Inheritance Tax (IHT) can be a significant concern for married couples in the UK looking to pass on their wealth to their children or grandchildren, but there are strategies available to minimise your liability and preserve more of your estate for your loved ones.
This blog post provides practical tips and planning advice on how married couples can effectively navigate IHT thresholds, including details on combining allowances, the transferable nil-rate band, and strategies like gifting and trusts.
Understanding the inheritance tax thresholds
IHT is charged at 40% on the value of an estate above a certain threshold, known as the nil-rate band. For the tax year 2024/2025, the standard nil-rate band is £325,000, which means that the first £325,000 of an individual’s estate is exempt from IHT. Anything above this amount is subject to the tax.
In addition to the standard nil-rate band, the UK government introduced the residence nil-rate band in 2017, which offers an additional threshold specifically related to the family home.
For the 2024/2025 tax year, the RNRB is £175,000, bringing an individual’s potential tax exemption from IHT to £500,000. The important thing to note is that married couples can combine their (residence) nil-rates bands to give them a combined exemption of £1 million.
Minimising your estate’s IHT liability
While the nil-rate band and the residence nil-rate band offer significant relief, there are additional strategies that married couples can use to further minimise their IHT liability.
1. Gifting
One of the most effective ways to reduce the value of your estate is by gifting away some of your money and assets during your lifetime. Under UK law, any gifts made more than seven years before your death are exempt from IHT. If you die within seven years after making the gift, it will be taxed but at a lower rate than the full 40%. This is known as the “seven-year rule.” Therefore, by making gifts early and strategically, you can significantly reduce the taxable value of your estate.
Additionally, you can take advantage of the annual exemption, which allows you to give away up to £3,000 each year, free from IHT. If you didn’t use your allowance in the previous year, you can carry it forward, allowing a total of £6,000 to be gifted in one year. You can only roll your allowance forward by one year, so there is an element of ‘use it or lose it’ at play.
2. Trusts
When you put money and assets into a trust, you give up your right to them meaning they have left your estate and their value may not be factored into any IHT charges if you pass away at least seven years after they are transferred into the trust.
You just need to bear in mind that when you set up a certain type of trust called a discretionary trust, there is a 20% inheritance tax charge when the value of the money and assets placed in the trust exceeds the nil-rate IHT threshold.
3. Giving to charity
Another way to reduce the amount of IHT due an estate is to donate a gift to a charity. Any amount of money left to a charity is entirely expempt from IHT, letting you give as much as you want to a good cause. But if you give at least 10% to charity, your rate of IHT is reduced from 40% to 36%, potentially saving your beneficiaries a lot of money.
You should make it clear in your will which charity or charities you are donating to, and how much you are giving away.
Get in touch with us to build an inheritance tax plan that benefits your loved ones.