Your clients may have spent years accumulating wealth to fund their desired lifestyle and leave a legacy for their loved ones.
And yet, research by FTAdviser has revealed that only 26% of high net worth individuals have Inheritance Tax (IHT) mitigation strategies in place.
Unfortunately, as an individual’s wealth increases, so does their potential IHT liability.
What’s more, while the value of your clients’ homes and other assets may have risen in recent years, IHT thresholds have been frozen at their 2020/21 levels until at least April 2028. This could mean that more of your clients’ estates fall outside the thresholds and may be liable to IHT.
So, if your clients don’t create an estate plan, this could result in a considerable IHT bill for those they ultimately leave behind.
Read on to learn more about IHT and discover three useful tips that could help your wealthy clients mitigate a potential IHT bill.
Inheritance Tax: The basics
IHT may be levied on your clients’ estates when they die as well as on certain lifetime gifts they make.
The standard IHT rate is charged at 40% (2024/25) of the value of an individual’s estate that exceeds the nil-rate band – £325,000 for the 2024/25 tax year.
Your client could potentially boost their IHT-free allowance to £500,000 by using their residence nil-rate band. They can claim this additional allowance of £175,000 if they pass on a residential property to their direct descendants – usually a child or grandchild.
Your high net worth clients are likely to have estates that exceed the IHT thresholds, so careful estate planning is crucial to ensure that their wealth is passed on as tax-efficiently as possible.
3 useful estate planning tips for your high net worth clients
1. Leave pension savings to loved ones
If your clients have a workplace or private pension, this could provide an extremely tax-efficient way to save, and it may also mitigate a potential IHT bill.
This is because pensions usually sit outside an estate for IHT purposes.
While your clients’ beneficiaries may pay some Income Tax on any money they withdraw from an inherited pension, this could be less than the standard IHT rate of 40%.
The amount of Income Tax payable depends on an individual’s age at the time of their death. If a person dies before their 75th birthday, their loved ones can enjoy their pension tax-free. If they die after turning 75, their beneficiaries may have to pay Income Tax at their marginal rate – which may still be less than an IHT charge.
A financial planner can help your clients navigate these complex rules, allowing them to pass on their pension wealth as tax-efficiently as possible.
2. Consider placing some assets in trusts
A trust is a legal arrangement where an asset is placed under the control of a trustee or group of trustees. This can be a useful way of providing for loved ones in the future.
For example, your clients may choose to place some assets in trust for their children to access when they reach 18.
Once assets are placed in trust, they will no longer be considered part of an estate for IHT purposes – provided that the individual survives for more than seven years after placing them in trust.
However, trusts are not entirely free from IHT. Depending on which type of trust your clients set up, they may need to pay:
- When setting up a trust – usually 20% IHT is payable on assets that exceed the nil-rate band
- Each 10-year anniversary – normally a 6% IHT charge is due on the value that exceeds the nil-rate band
- When the trust is closed – your beneficiaries may have to pay up to 6% tax.
So, while trusts are not an IHT-free option, they could allow your high net worth clients to shield some of their assets from the standard 40% rate.
Your clients might also want to consider writing a life insurance policy in a trust to meet a potential IHT liability. This could provide valuable financial protection to dependents in the event of premature death. Your clients’ beneficiaries could use this lump sum to pay the IHT due on the rest of the estate.
3. Give gifts to loved ones during their lifetime
One of the simplest ways for your wealthy clients to reduce a potential IHT bill is by giving money and assets away during their lifetime. By making a “living inheritance” your clients could also enjoy seeing the difference their wealth makes to their loved ones.
There are several gifting exemptions and allowances your clients could benefit from.
Annual exemption
An individual can give away gifts worth up to £3,000 (2024/25) each tax year. Your clients can carry unused annual exemption forward for one year.
For example, if they give gifts worth £2,000 in the 2024/25 tax year, they could carry £1,000 forward and increase their exemption to £4,000 for 2025/26.
Small gift allowance
This allows your clients to give as many “small gifts” of up to £250 as they like, provided they don’t use another allowance on the same person.
Gifts for weddings and civil partnerships
The amount your clients can gift depends on their relationship with the recipient. They can give up to £5,000 tax-efficiently to a child, £2,500 to a grandchild or great-grandchild, and £1,000 to anyone else on the event of their wedding/civil partnership.
Gifts out of surplus income
This can be an effective way to reduce the value of an estate and provide ongoing support to a loved one.
Your clients can gift money to their chosen beneficiary directly from their income, rather than from savings.
However, to qualify for this exemption your client must make regular payments from their income – rather than a transfer of capital assets – and they must be able to maintain a reasonable standard of living while making the gifts. It’s important to keep clear records of such gifts.
Any gifts that fall outside the above exemptions and allowances will usually be classed as potentially exempt transfers (PETs). This means that if your client dies within seven years of giving a gift, IHT may be payable on any amount that exceeds the nil-rate bands.
Get in touch
By implementing a robust estate plan, your high net worth clients could make a real difference to their loved ones lives while reducing the value of their estate for IHT purposes.
If your client would like to know more about how to create an estate plan and pass on more of their wealth to loved ones, we can help.
Please email us at mail@delaunaywealth.com or call 0345 505 3500.
Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate estate planning or tax planning.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
Workplace pensions are regulated by The Pension Regulator.
Remember that taper relief only applies to gifts in excess of the nil-rate band. It follows that, if no tax is payable on the transfer because it does not exceed the nil-rate band (after cumulation), there can be no relief.
Taper relief does not reduce the value transferred; it reduces the tax payable as a consequence of that transfer.