Estate planning comes in many shapes and sizes, but there are several strategies that are commonly used.
For instance, you may have already:
- Made full use of your nil-rate bands
- Used your annual gifting allowance
- Put some of your assets into trust.
However, there are several other Inheritance Tax (IHT) mitigation strategies that are often overlooked and underused, simply because many are unaware of them.
Read on to discover five you may be missing out on.
1. Taking out life insurance and putting it in trust
One IHT-mitigation strategy that may become increasingly popular going forwards is to take out life insurance and put it in trust.
When you take out a life insurance policy, your beneficiaries will usually receive a payout on your death. If you put the policy in trust, it is removed from your estate for IHT purposes, meaning the full payout will go to your beneficiaries.
With pensions set to become liable for IHT from April 2027, many people are choosing to use some of their pension wealth to pay for a policy held in trust so their wealth can pass to beneficiaries efficiently.
However, life insurance can be expensive, and if you don’t maintain your payments, the cover will end and you may receive little or nothing in return. So, it’s important to seek advice before adopting this strategy.
2. Making regular gifts from surplus income
Making regular gifts from your income is a simple and effective way to supplement your standard gifting allowance, which permits you to gift up to £3,000 every year without it counting towards your estate for IHT purposes.
There is no set limit on how much you can give using this exemption, and the gifts fall outside your estate immediately rather than becoming exempt only after seven years, provided the following conditions are met:
- The money must come from your income, not savings or other assets.
- There must be a regular pattern of giving.
- The gifts must not affect your financial security.
If you plan to use this exemption, it’s important to keep detailed records, so HMRC can see that the conditions were met.
3. Investing in Business Relief schemes
Business Relief (BR) can offer up to 100% IHT relief on certain qualifying assets.
While you may benefit from BR if you are a business owner, you don’t necessarily need to run a business yourself to make use of this relief.
Some investors choose to include BR-qualifying investments within their portfolios as part of their wider estate plan.
Investing in BR can also come with key advantages that other IHT-mitigation strategies lack.
For example, investing in BR assets allows you to reduce the potential IHT liability on your estate while still retaining ownership and access to the capital. Moreover, qualifying assets can become eligible for BR after being held for two years.
Conversely, lifetime gifts above your allowances take seven years to fall fully outside your estate, and making a gift usually means giving up control of the asset.
However, BR investments can come with risk, so it’s important to speak to a financial planner before opting to invest in them.
4. Donating to charity
Any gifts left to registered charities in your will are exempt from IHT, meaning they are removed from the value of your estate when calculating your potential liability. Donations made during your lifetime also benefit from this exemption.
Moreover, if you leave at least 10% of your net estate to charity, the rate of IHT applied to the rest of your taxable estate falls from 40% to 36%.
This means that a carefully considered donation can provide support to causes you believe in while potentially reducing the amount of tax payable by your beneficiaries.
5. Making a deed of variation
A deed of variation allows those inheriting from your estate to redirect some or all of their inheritance as though the changes had been included in your original will.
While it’s not technically a way to mitigate IHT on its own, it can give your beneficiaries greater flexibility to make changes after your death that may improve the tax efficiency of your estate.
There are several ways this flexibility can be used to reduce a potential IHT liability.
For example, if your original will did not make full use of available allowances, such as the residence nil-rate band or the spousal exemption, a deed of variation could allow your beneficiaries to restructure the inheritance to take advantage of these rules.
It can also be used to redirect part of your estate to charity, which may reduce the IHT rate charged on the remainder of the estate, as discussed above.
Another option is to use a deed of variation to pass assets directly to the next generation. This can be particularly useful if your children are financially comfortable and don’t need the inheritance themselves, as it allows the wealth to move to grandchildren or other beneficiaries without being taxed again as it passes through each generation.
The variation must be made within two years of your death, and everyone affected must agree to the changes.
Get in touch
If you have yet to use some of these strategies and want to further improve the efficiency of your estate plan, get in touch.
Email us at hello@vwmwealth.com or call us on 0141 229 4004.
Please note
This article is for general information only and does not constitute advice. The information is aimed at individuals only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate estate planning, trusts, or will writing.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
