With the Inheritance Tax (IHT) threshold being frozen until 2031 and pensions being included in the IHT calculation from April 2027, more estates are finding themselves rising above £2m in value.
As you are no doubt aware, the standard nil-rate band is £325k and there is an additional nil-rate band of £175k if leaving a home to children or grandchildren. This means that couples can combine allowances to pass on up to £1m tax-free. However, for every £2 your estate is worth more than £2m, you lose £1 of this residence nil-rate band until it disappears. This means estates left by a single person worth £2.35m receive no residence nil-rate band, while for couples it’s £2.7m
There are several ways to reduce your estate’s value in a tax-efficient manner:
- Gifting – annual exemption of £3k per tax year, small gifts of £250 per person (unlimited recipients but cannot combine with other allowances for the same person), and wedding gifts of up to £5k for a child’s marriage. Unlimited gifts become IHT-free if you survive 7 years (the “7-year rule”).
- Charitable Gifting – gifts to charity reduce your taxable estate. Leaving 10% or more of your estate to charity reduces the IHT rate from 40% to 36%.
- Downsizing – moving to a cheaper home releases equity and reduces estate value. But you must give away or spend the released equity for it to reduce your estate (the 7-year rule may apply).
- Accessing pension wealth earlier – with pensions entering IHT from 2027, drawing down earlier may reduce your estate’s value. But once taken, tax-free lump sums cannot be put back into the pension and you must ensure withdrawals don’t jeopardise your retirement income.
Please get in touch to discuss these and other ways of reducing your IHT exposure.
