UK inheritance tax (IHT) receipts hit £6.1 billion in the 2021/22 tax year, a yearly increase of 14% and and the largest rise since 2015/16. But views on IHT vary and it is an emotive topic.
Having paid taxes all their lives, some see it as unfair that their hard-earned assets might fall again into the hands of HMRC. Others accept IHT as just another tax, with their family or friends in line to receive a significant inheritance either way.
No matter your stance, if leaving an inheritance is important to you, it’s wise to consider how to pass on your wealth tax-efficiently.
Alongside achieving financial independence and securing a comfortable retirement, this is one of our clients’ most common long-term financial goals. And it is an area where our holistic estate planning advice for high net worth families can prove most valuable.
In this guide we explain the basics of IHT and explore the various ways to mitigate the impact of IHT on your beneficiaries
What is IHT?
IHT is a tax that applies to your estate when you die. It can also apply to some lifetime gifts made in the seven years before you die, and to specific types of trusts.
What is considered as your estate?
Your estate is the assets that you own when you die (such as property, possessions, cash and investments) less your liabilities (such as mortgages and other borrowings). Notably, pensions very rarely count towards your estate for IHT purposes. You can also obtain some reliefs/exemptions on other assets as explored further below.
Otherwise, the parts of your estate subject to IHT are determined by your domicile rather than your residence. Domicile can be a complicated concept but, in simple terms, is the country that is (or is deemed to be) your permanent home or homeland. In determining your domicile, HMRC will consider where you have been resident over the last 20 tax years, and your ties to the UK.
If you are UK domiciled (or deemed UK domiciled having spent at least 15 of the last 20 tax years a resident in the UK), both UK and overseas assets are included in your estate for IHT purposes. If you are domiciled overseas (often referred to as ‘non-domiciled’ or ‘non-dom’), only UK assets are subject to IHT. Special rules mean that some common UK investments are exempt, however.
What is the rate of IHT?
The headline rate of IHT is 40% on your taxable estate. There are various exemptions, allowances and reliefs which mean that the effective rate of IHT paid on estates is usually lower, though.
Those leaving some of their estate to registered charities qualify for a reduced headline rate of 36% on the part of the estate that they leave to family and friends. And as we cover in a link below, where IHT applies to large gifts made during your lifetime, lower rates of IHT can apply due to Taper Relief. The rates of IHT applicable to the specific types of trusts subject to IHT are also different.
The residence nil-rate band
The residence nil-rate band (RNRB) is an extra IHT-free allowance applying to property, frozen at £175,000 until April 2028. This may increase your total tax-free allowance to £500,000, subject to criteria:
- You have owned and at some point lived in the property on or after July 8th 2015.
- You are leaving your home to direct descendants such as children, grandchildren and stepchildren.
Why is IHT a key part of estate planning for high-net-worth individuals?
IHT typically applies on the value of your estate above £325,000 , meaning that high-net-worth individuals can be more at risk of incurring large IHT bills.
If mitigating IHT is important to you, you may face considerations such as when to make gifts during your lifetime and what size. You will also be more vulnerable to changes in IHT legislation regarding thresholds or exemptions, for example.
Our estate planning experts can evaluate your position to make strategic recommendations with your financial goals in mind. Request a free consultation today and get ahead.
What IHT exemptions are available?
All assets transferred to a UK domiciled spouse or civil partner are exempt from IHT. If you are UK domiciled but your spouse is non-domiciled, they can elect (when you die) to be treated as if UK domiciled, or otherwise the spousal exemption is limited to £325,000.
Assets transferred to certain bodies are also exempt:
- Registered charities
- Community sports clubs
- Housing associations
- Qualifying political parties
- The ‘national interest’ (certain libraries, museums, art galleries and other similar institutions)
These exemptions apply to lifetime gifts and assets left as part of your estate. There are some important exemptions applicable to lifetime gifts only, which we cover separately later in this guide.
How can high-net-worth individuals mitigate IHT?
As well as giving to charity and transferring assets to a spouse or partner, there are several viable estate planning strategies for high-net-worth individuals. We’ve detailed some of the most popular and practical below.
Make a will (and keep it up to date)
A will specifies who inherits what from your estate; without one, the rules of intestacy apply, creating financial and administrative issues. Unmarried couples do not automatically inherit assets from a partner, for example. Read more:
Use pensions wisely
Pensions usually fall outside of your estate in IHT terms, so making contributions can reduce its value. There are other considerations, however, such as drawing from defined contribution pensions last, and nominating a beneficiary against your pension. Read more:
Make gifts during your lifetime
Another means of lowering the value of your estate and therefore your IHT liabilities, lifetime gifts are often a focal part of estate planning for wealthy families. There are three main ways of making them, categorised as immediately exempt transfers, potentially exempt transfers and chargeable lifetime transfers. Read more:
Make IHT-efficient investments
Certain investment assets qualify for IHT reliefs, lowering your potential exposure. Commonly claimed reliefs include Business Relief and Agricultural Relief; both can prove high-risk and complex, making expert advice invaluable. Read more:
Spend more
An alternative approach to estate tax planning for high-net-worth individuals is simply to reduce your estate by spending more. While doing so requires careful appraisal, something with which our specialists can assist, it may allow you to enjoy life to a fuller extent. Read more:
Insure against IHT liability
If you would prefer not to deploy some of the strategies above, life insurance could be a suitable way to offset your IHT liability. This commits you to paying premiums for the long-term , however. Read more:
Emigrate
Emigrating is unlikely to be a step that you would consider solely to reduce IHT but, if moving would suit your lifestyle and close connections, it could offer tax benefits too, depending on your destination. Achieving non-domiciled status in the eyes of HMRC can be difficult, however. Read more:
Optimise your IHT position with our Chartered Financial Planners
For maximum benefits and reassurance, it pays to consider these IHT mitigation options early as part of broader estate planning. Our high-net -worth estate planning specialists can help you to shape this vision, allowing you to pass on wealth tax-efficiently and achieve other long-term financial goals.
We work with a range of high-earners, including accountants, lawyers and medical professionals, to optimise their IHT liability on an ongoing basis. Here are some of the leading reasons to feel confident when enlisting our support:
- We can provide expert advice on all available avenues for minimising IHT liability, helping you successfully pursue the most suitable for you.
- IHT is one component of our broader estate planning services for high-net-worth families, as part of a holistic approach that we consistently find to be most effective.
- You can rely on our adaptability and proactivity in the face of evolving regulations, allowances and exemptions, as well as your own life events and goals.
- Our awards recognise our exceptional market expertise and tailored services in wealth preservation.
Speak to our team to learn how we can clarify and strengthen your position regarding IHT or other matters affecting your estate. We offer a free consultation with no obligation to continue with our services.