It is natural to want to leave as much to your loved ones as possible when you pass away which highlights the importance of protecting your estate and securing more of your wealth. This means that it is especially important to manage your finances as early as possible.

Accumulating Wealth During Your Lifetime

It’s likely that your family might face a high Inheritance Tax bill if you fail to put the right financial arrangements in place. Ensuring that assets are passed efficiently to family members is a priority for many who have accumulated wealth during their lifetime. It’s also possible to use funds or charitable interest to see how your wealth can benefit others during your lifetime while also leaving a legacy.

Inheritance Tax is the amount of tax that is owed on an estate after someone passes away. The value of the estate will be calculated and the amount of Inheritance Tax will be based on this.

The Nil-Rate Band

The amount of tax that has to be paid upon death is 40% while it is 20% for lifetime transfers where this is applicable. The first £325,000 of any estate is charged at 0% and this is known as the nil-rate band. This rate has been in place since 2009 although there is an additional nil-rate band. This came into effect for deaths after the 6th April 2017 and an interest in a qualifying residence will pass directly to descendants. The relief is set at £175,000 for 2022/23 and has been phased in over the last four years.

The relief is doubled for married couples and civil partnerships as each individual will have a nil-rate band while all will benefit from the residence nil-rate band.

The Potential for Challenging Calculations

The residence nil-rate band is only applicable to one residential property and it does not need to be the main home of the family but it must have been the home of the deceased at some point. There are restrictions in place for estates that are valued in excess of £2 million.

If a person died prior to 6 April 2017, then the relief will not be applicable. However, the surviving spouse will be entitled to a rise in the residence nil-rate band if the spouse who died sooner has not used or was not entitled to use their full residence nil-rate band. There are complex calculations involved but a doubling of the residence nil-rate band for the surviving spouse will increase as a result.

Lifetime Giving Makes Sense

There are some ways to reduce the amount of Inheritance Tax you have to pay. You can give a small number of gifts each year without creating an IHT liability. Every individual will have their own allowance which makes it possible to double it if each spouse or registered civil partner makes use of their allowance.

It is also possible to give gifts that have a larger value and these are called ‘Potentially Exempt Transfers’ (PETs). However, if you pass away within seven years of giving these gifts, IHT will have to be paid on them. There are also Chargeable Lifetime Transfers (CLTs) and these relate to gifts that are made during your lifetime that do not qualify for PET and these will be susceptible to IHT.

CLTs and taxation can prove complex which means that you should obtain professional advice if you are thinking about a CLT.

What are Considered Exempt Transfers By HMRC?

  • A maximum of £3,000 per year as one or several gifts. You can carry the remainder over to the following tax year if you do not use it all or some of it.
  • Gifts up to a maximum of £250 for any number of people but not those who have already been gifted some or all of the £3,000
  • Any amount that is paid from income that is paid regularly providing your standard of living does not drop. This is known as ‘normal expenditure of income’
  • If a child is getting married, you can give them £5,000. A grandchild or distant descendant can receive £2,500 while a friend or other person can be gifted £1,000
  • Donations to charity, universities, and political parties that are recognised by HMRC.
  • Maintenance Payments made to spouses, elderly relatives or children in full-time education or under the age of 18.
  • Gifts of a small business or sole trader enterprise as well as shares in companies that are listed on the smaller stock exchange
  • Farmers can take advantage of a relief of up to 100% when gifting agricultural land or farm buildings. The rules surrounding this can prove complex
  • Members of the Armed Forces who have lost their lives in action or where their eventual death is caused by injuries obtained while on active duty.

Take Out Life Insurance

If you decide that you don’t want to give away your assets while you are alive, you could consider taking out life cover. This will pay out an amount that will equate to your assumed IHT liability when you pass away. If you take out a life insurance policy that is written under an appropriate trust, it could be utilised to help cover IHT.

In normal circumstances, any payouts made from your life insurance will be included as part of your legal estate and is susceptible to IHT. However, by choosing to write a life insurance policy in a suitable trust, all proceeds from the policy will be paid to the beneficiaries as opposed to your legal estate. This will mean that it is not included when IHT is calculated.


Our financial advisers can help you pass on more to your loved ones in the most tax-efficient way. Book your free, no obligation today to learn more about how we can help you with your estate planning matters.