10 ways to help passing on your estate to your loved ones

While we all want to leave a legacy for our families, making sure they are provided for while we plan for our retirement is a delicate balancing act. 

Inheritance Tax (IHT) is levied at 40 per cent on estates over a certain threshold, and the tax bill can eat into the money you leave for your family. On the other hand, if you give away money too soon , you may not be able to provide for yourself in retirement. 

The following ten tips could help your family to pay less inheritance tax, whilst leaving you comfortable in retirement.

1. Use potentially exempt transfers

One of the better-known ways to pass on wealth free from Inheritance Tax is to give it to your family or other loved ones more than seven years before your death. 

Of course, there is a degree of unpredictability in the outcome, because if you were to die within seven years of making the gift, IHT may be charged, though the rate will be reduced if more than three years have passed. 

2. Make personal gifts

Gifts up to a certain value can be made free from IHT even in the last years of your life. Your allowance includes: large gifts totalling no more than £3,000; unlimited small gifts of up to £250; and wedding gifts of up to £5,000 for your children, £2,500 for your grandchildren, or £1,000 for others. 

Gifts made within your regular pattern of income and normal expenditure (for example, quarterly payments towards a grandchild’s school fees from your annual income) can usually be made free from IHT too, although it is best to document these in case of questions later on.

3. Give to charity

If you want to reduce the size of your estate to within the IHT threshold, you can make charitable gifts to reduce it, as these are free of IHT.

Additionally, if at least 10% of your total estate is gifted to charity, it will reduce the rate of Inheritance Tax payable on your remaining estate (above the nil-rate band) from 40 per cent to 36 per cent.

4. Take out life insurance

It is possible to take out a life insurance policy written in an appropriate trust that can provide a lump sum on your death to be used to pay the resulting IHT bill. If this policy is within a trust, the lump sum paid out will not count towards your estate. 

Insurance can also be taken out when making large financial gifts to cover the IHT bill if you were to die within the following seven years. This is called a ‘decreasing term assurance’ policy. An adviser should be able to help you with the suitability of these for your situation.

5. Keep your pension invested

Typically, though with some exceptions, pensions are excluded from the calculation of your estate and can be passed on free from IHT. If you name a beneficiary for your pension you can pass these benefits on to them outside of your estate but is important to name a beneficiary to whom the pension would go to if you pass away.

It is also possible to make payments in your lifetime into another person’s pension, which will protect this money from Inheritance Tax. For example, you can set up a Junior Self-Invested Personal Pension for a grandchild under the age of 18 and pay in up to £2,880 a year. But they will not usually have access to this money until they reach age 55 - and this age is expected to rise.

6. Use a discretionary trust

A discretionary trust can help you to reduce your estate’s IHT liability by holding money in the name of your beneficiaries while you retain control. You can use your nil-rate band to pay in up to £325,000, which will be excluded from your estate after seven years. 

Funds above the nil-rate band may attract a lifetime tax charge.

7. Loan your money to a trust

If you would like to protect your money in a trust but need to know you can withdraw it if you need it, it’s possible to loan money to a trust. 

You will always have the option to withdraw the original capital you loaned, but any growth on that capital will be protected within the trust from Inheritance Tax.

8. Draw up a discounted gift trust

A discounted gift trust allows you to earmark some wealth to be passed to a beneficiary or beneficiaries on your death, but with the income generated paid to you in your lifetime. 

This will exclude the contents of the trust from your estate for Inheritance Tax purposes but still provide you with regular payments from it.

9. Use business relief when passing on assets

If you have business assets, you can pass these on in your lifetime or after death with IHT relief of up to 100 per cent. This includes a business, an interest in a business or shares in an unlisted company.

All will usually qualify for 100% Business Relief. Land, buildings and machinery related to the business will usually qualify for 50 per cent Business Relief, as will shares controlling more than 50 per cent of the voting rights of a listed company.

10. Remember agricultural relief

For those who own land or pasture for rearing crops or animals as part of a working farm, you can pass this on free of IHT thanks to Agricultural Relief. This can be done during life or after death.

THE FINANCIAL CONDUCT AUTHORITY DOES NOT REGULATE TAXATION AND TRUST ADVICE AND WILL WRITING. TRUSTS ARE A HIGHLY COMPLEX AREA OF FINANCIAL PLANNING. INFORMATION PROVIDED AND ANY OPINIONS EXPRESSED ARE FOR GENERAL GUIDANCE ONLY AND NOT PERSONAL TO YOUR CIRCUMSTANCES, NOR ARE INTENDED TO PROVIDE SPECIFIC ADVICE. TAX LAWS ARE SUBJECT TO CHANGE AND TAXATION WILL VARY DEPENDING ON INDIVIDUAL CIRCUMSTANCES.