The largest ever transfer of wealth from one generation to another is expected to occur in the next 30 years, with somewhere in the region of £5.5tn-£7tn passing on in the UK[1]. This is being called the great wealth transfer. Therefore, it is unsurprising that inheritance planning is an increasingly important part of wealth management.
Rising property prices, asset price inflation and frozen tax thresholds mean that more and more people are being dragged into paying inheritance tax (IHT), with HMRC receipts reaching £7bn between April 2024 and January 2025[2]. Given that even though this figure is large it represents less than 1% of total tax revenues and was levied on only 4% of the population, a chancellor looking to shore up public finances may find IHT an appealing target.
History suggests that preserving and growing intergenerational wealth is notoriously challenging. Unfortunately, it is far too common for people to address this issue in the wrong place, initially focusing on what they invest in rather than their personal financial framework. Identifying investment goals, aims and timeframes is the best place to start in our experience, allowing you to identify the optimal approach that will provide the bases and essential guidelines in managing your wealth.
Being proactive gives you the best chance of achieving your goals. Having discussion around death and legacy can be difficult, but it is far easier to talk about it when you are in a stable position in your life. Managing finances and investing are often emotive, so it is far from ideal o gave to make big decisions when you’re going through emotional distress linked to sickness or bereavement. Even high-level discussions with practical steps of who to contact if you become incapacitated can make the process far less painful.
We help our clients look at various ways they could reduce their IHT liability, pass on as much wealth as possible to loved ones, and structure their family wealth to suit their own needs and circumstances.
What is inheritance tax?
A 40% inheritance tax rate is generally charged on the value of everything owned above an allowable threshold, known as the nil rate band. The nil rate band is currently set at £325,000 and is frozen until 2030. There is also a residence nil-rate band, which means that no IHT is charged if a home is left to “direct descendants”. The residence nil rate is currently £175,000 and also frozen until 2030.
How can I reduce my IHT bill?
The main approach to avoiding inheritance tax is to reduce the value of your estate. The smaller your estate on death, the less your IHT liability will be.
Gifting and exemptions:
You can reduce the value of your estate and therefore the amount of IHT you are liable for by “gifting away” some of it during your lifetime. Some gifts are completely free of IHT whereas others will still be liable, albeit at a reduced rate in many cases.
There is no IHT to pay on transfers between most married couple or civil partners living in the UK, whatever the amount. However, if you do decide to pass your estate on to your spouse or civil partner, a potential liability can build up again on their death. This is why many couples decide to pass their estate on to their children of grandchildren.
Individuals are entitled to give away £3,000 in any tax year, free from IHT. The allowance can be backdated by one year, meaning a married couple could give away a total of £6,000 a year without incurring IHT (or £12,000 if the previous year’s allowances were unused).
Wills:
Writing a will and keeping it up to date is an essential part of estate planning and can also be used to reduce a potential tax bill. Many people incorrectly believe that their whole estate will go to their spouse or civil partner when they die. However, without a will this may not be the case.
Business relief:
Owners of businesses are eligible for certain tax reliefs, depending on the type of business. In many instances, a business transfer on death is completely from any IHT liability.
This article is intended as an introduction to inheritance tax and if you would like to know anything further, please don’t hesitate to download our IHT and wealth transfer guide (HERE) or get in contact with a Quilter Cheviot financial planner who can assist with any queries.
[1] £7 trillion is changing hands: what the great wealth transfer means for you | Unbiased