Ways to Avoid Inheritance Tax

There are some specific strategies to help protect your family’s assets, building on last week’s general tax planning advice.

Here are some essential actions you can take to mitigate your inheritance tax burden under the new rules following the 2024 Budget.

Avoid Inheritance Tax

(Read Time: Approx. 4 minutes)

Topics Discussed:

  • Steps to take under the new inheritance tax regulations
  • Legal strategies for inheritance tax efficiency

Changes Following the Budget 2024

Rachel Reeves recently introduced significant changes in the Budget, particularly the inclusion of unspent pensions for inheritance tax starting in April 2027.

The new rules remove several tax breaks, especially for pensions, farms, and family-owned business assets, resulting in more estates exceeding the £1 million threshold.

For many, this means facing the 40% inheritance tax on estates over the £325,000, unchanged since 2009 and now frozen until 2030.

As a result, households with estates previously below the taxable level may now need to consider tax planning strategies.


Understand the Impact of Pension Rule Changes

Not all estates will immediately be impacted by the pension inclusion, but it’s essential to review your current assets against the tax-free lifetime threshold of £325,000.

If your pensions and assets exceed this threshold, a tax bill is inevitable but can be avoided with effective tax planning.

Couples can combine allowances to reach a £1 million exemption, but consulting Tax Expert can clarify if your heirs might face new liabilities.


Take Advantage of Annual Gift Allowances

Every tax year, you can give away up to £3,000 without affecting your estate’s taxable value.

This “annual exemption” allows you to reduce your estate’s value strategically.

If you haven’t used this allowance in previous years, you can carry it forward for one year.

Beyond this, small gifts of £250 per recipient and specific exemptions for wedding gifts (£5,000 for children, £2,500 for grandchildren) offer additional ways to distribute wealth tax-efficiently.


Utilise the Seven-Year Rule for Larger Gifts

Gifts given seven or more years before death escape inheritance tax under the “seven-year rule.”

For gifts given within seven years, taper relief applies, with the tax rate reducing over time.

Gifts within three years before death are taxed at the full 40%, while gifts made between three and seven years see a sliding scale of reduced tax rates.

Proper documentation of gifts helps avoid complications for your heirs.


Use Regular Income for Supportive Payments

Payments made from regular income (e.g., a monthly allowance for a child or contributions to an elderly relative’s care) are inheritance tax-free.

This “normal expenditure out of income” exemption is unlimited, provided the payments do not reduce your standard of living.

For families looking to support loved ones now, this is an advantageous approach without affecting the taxable estate value.


Pass Down Your Main Residence

Leaving your primary home to children or grandchildren provides an additional £175,000, via the Residence Nil Rate Band. This increases the inheritance tax threshold to £500,000.

Combined with a spouse’s allowance, couples can shield up to £1 million when transferring ownership of their home.

However, this only applies to inherited by a direct descendant (children, grandchildren, great-grandchildren, or a spouse of one).

This excludes nephews, nieces, and cohabitee’s children but includes stepchildren.

The estate must also be worth less than £2 million.


Charitable Donations and Tax Benefits

Gifts to charity in your will reduce the inheritance tax rate from 40% to 36% on your remaining estate when 10% or more is donated.

All donations are tax-exempt, so including charitable contributions benefits both your estate and the causes you care about.


Establish Trusts for Future Generations

Trusts offer a structured method to reduce inheritance tax liability.

Assets held in trust are managed by trustees for the benefit of heirs, helping to prevent immediate tax implications upon transfer.

Trusts are particularly useful when skipping generations (i.e., gifting directly to grandchildren) as they reduce the frequency of tax applications on passed-down assets.

Although trusts involve some complexities, their controlled structure allows for tax efficiency and long-term financial protection.


Summary

The recent Budget changes mean inheritance tax planning is now more crucial for many families.

With the freezing of thresholds and new pension inclusions, seeking expert guidance is key to protecting your legacy.

Contact Tax Expert today to discuss how you can optimise your estate planning, ensuring your family benefits from careful, legally compliant planning.

Fill out our form here for any questions, give us a call at 01772 788200, or message us on our WhatsApp for out of office hours.


Kind regards,

Ilyas Patel