Giving away assets during your lifetime can be a very simple way of providing a much-needed boost to grown-up children moving up the property ladder or even to grandchildren saving for their first home. It could also have the added benefit of reducing your estate for inheritance tax purposes.
There are plenty of ways to protect your wealth from tax bills. Some are straightforward, others may require the help of an adviser. There are also ways to potentially mitigate tax liabilities after you die.
Here are 10 of the most important things we think you should consider:
Having a will in place allows you to set out – in a legal document - what will happen to your finances and assets when you die. You might think everything will automatically go to your loved ones if you die without making a will. Sadly, that’s not always the case and dying without a will (also known as intestacy or dying intestate) can cause a number of problems for the family and loved ones you leave behind.
Our recent Family and Finances Report found that 41% of UK adults don’t have a will in place. Without a will, your money, property and possessions will be shared out according to the law instead of your own wishes. The courts will decide who benefits from your estate, regardless of your relationship with those people whilst you were alive. This could be very different to your wishes and could lead to potential disputes within families.
For those who already have a will in place, it’s just as important to review it, if and when circumstances change.
Making a will can also be a valuable exercise in mitigating tax. You can use your will as part of your estate planning. Everyone has something called the nil rate band, and you may be able to also use the residence nil rate band, depending on your personal circumstances. The nil rate band is currently £325,000 and if your circumstances mean your executors can claim the residence nil rate band, this may be up to a further £175,000.
Married couples and civil partners can inherit their spouse’s entire estate tax-free and receive any of their unused allowance - potentially doubling the tax-free limit for couples to £1,000,000.
If you have received an inheritance in the past two years but have no need of it yourself, a will trust allows you to put it outside of your estate immediately for inheritance tax purposes.
But it is not lost to you entirely as you can still draw on the income and capital. However, you have to act within the first two years following the death of the person you have inherited the money from.
Our Family and Finances Report discovered that one in four (24%) respondents have gifted significant money or assets to family members, while another 26% plan to do so. This proactive approach not only helps mitigate tax liabilities but also helps out loved ones while the benefactor is still around to witness the positive impact. You can give away up to £3,000 each tax year which is exempt from inheritance tax. If you haven’t used this annual exemption during the previous tax year, it can be carried over into the next tax year. As a couple, that means you’ll be able to give away £6,000, and potentially £12,000 in a year if you didn’t make any substantial gifts the year before. You can also give £250 to any number of people every year, but you cannot combine it with your annual £3,000 exemption. If your children or grandchildren are getting married or entering into a civil partnership you can gift an additional £5,000 to a child or £2,500 to your grandchild.
Most gift in excess of these cash gift exceptions are classed as Potentially Exempt Transfers (PETs) which means there is no tax charge at the time of gifting, and provided you survive for seven years from the date of the gift, there shouldn’t be any liability to inheritance tax on your death.
As well as cash, you can also give away all types of assets, such as property and shares, tax-free. This is as long as you live for seven years after making the gift. If you die within this seven-year window, IHT may be payable and is assessed on a sliding scale.
One of the most useful but surprisingly under-utilised exemptions is the ‘gifts from normal expenditure’ rule. This allows you to give away unlimited cash without falling foul of the seven-year rule – as long as it’s from surplus income and doesn’t reduce your standard of living or force you to dip into your capital to cover day-to-day costs.
There are a number of trusts you can use to mitigate inheritance tax. These can be perfect for setting aside a sum of money to protect minors or the vulnerable. Some trusts allow you to draw an income as long as you don’t touch the original capital. Putting the assets within a trust is regarded as a gift and so falls within the gifting rules, but some kinds of trusts can cast very long shadows of up to 14 years. Specialist advice could be crucial to ensuring the right trust is chosen for your particular needs and goals.
Pensions have long been considered one of the most tax-efficient ways to pass on wealth. However, following the Autumn Budget 2024, significant changes are coming into effect. From 6 April 2027, most unused pension funds and death benefits will be included in the value of a person’s estate for inheritance tax purposes. This means that, unlike before, these pension savings may now be subject to IHT, depending on the total value of the estate. Currently, if you die before age 75, your beneficiaries can still inherit your pension savings tax-free. If you die after age 75, withdrawals made by your beneficiaries are taxed as income at their marginal rate. These income tax rules remain in place, but from 2027, IHT may also apply on the value of the pension fund itself. Beneficiaries can still choose to receive a lump sum or inherit your drawdown plan and take income as needed through inherited drawdown. This flexibility remains, but the potential IHT liability adds a new layer of consideration. It remains crucial to nominate your beneficiaries through your pension provider, as this process is separate from your will and ensures your wishes are followed.
Jewellery, antiques, paintings, stamp collections and similar items – known as ‘chattels’ – are all counted as part of your estate for IHT purposes. If you give them away, they will be exempt from inheritance tax as long as you live for seven years afterwards. ‘Reservation of benefit’ rules apply, so if you sign over a valuable diamond ring, you shouldn’t continue to wear it.
On all counts, it is vital to keep a record of all the gifts you make and who received them to avoid confusion in the future. This is particularly true when giving away surplus income. A paper trail with details of your income and expenditure will be crucial for your executors to prove that the money given away was money you didn’t need.
The need for estate planning is becoming increasingly common as rising house prices push up the total value of people’s net wealth. While IHT was intended to be a tax on only the very wealthiest estates, the freezing of the inheritance tax threshold since 2009 has meant that many more people have been caught in its net. But inheritance tax planning is complex because of the various considerations you need to take into account. These include the size of your estate, your health, what you can afford to give away, and what you might need in the future. Taking professional advice on tax and estate planning could prove to be money well spent. It could help you make sure your wishes are respected and provide peace of mind that your heirs can inherit your estate in the most tax-efficient manner. But remember it’s absolutely crucial not to leave yourself short of money you might need to fund your lifestyle and potential future care costs just to save on tax bills.
This article is for information purposes only. It is not intended as advice.
Tax treatment depends on the individual circumstances of each client and may be subject to change in the future.
The retirement benefits you receive from your pension plan depend on a number of factors including the value of your plan when you decide to take your benefits which isn't guaranteed and can go down as well as up. The benefits of your plan could fall below the amount(s) paid in.
Schroders Personal Wealth does not provide estate planning and administration, trust management or will writing, however we can introduce you to a relevant specialist. We might receive a referral fee from some of the partners we introduce to you.
Any views expressed are our in-house views as at the time of publishing.
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