Five ‘Tools’ to Slash IHT Bill with Soteria Trusts
Please be advised that the information in this article regarding QNUPS and IHT is no longer accurate due to the recent changes announced in the UK Budget. Starting in April 2025, the regulations will have significant implications that may affect your understanding of these topics. We encourage you to stay informed and consult with a Soteria Trusts expert to navigate these changes effectively.
Inheritance tax is a subject that often gets ignored until it is too late. An increasing number of families are finding themselves faced with hefty inheritance tax bills, which can be a source of unnecessary stress which not only delays but also significantly reduces the transfer of intergenerational wealth. In fact, recent reports suggest that a house bought in 2022 is three times more likely to result in families being hit by inheritance tax than in 2009 when the IHT allowance was first frozen.
In 2009, only 13 per cent of property acquisitions in England and Wales, totalling 83,266 out of 625,205, exceeded the £325,000 mark. However, this figure surged to 40 per cent in 2022, more than tripling in comparison. There was a sharp 17% increase in families paying IHT between the 2019/20 and 2020/21 tax year alone.
Fret not; there are ways you can reduce your inheritance tax bill and protect your wealth with Soteria Trusts.
1. Understand Inheritance Tax
Firstly, it is essential to understand the rules around inheritance tax. Currently, the tax-free threshold for inheritance tax is £325,000 for individuals, meaning any estate valued above this amount will be subject to IHT at the rate of 40%. However, this threshold has a few exclusions, including the transfer of assets between spouses or civil partners. The “spousal exemption” means that any assets left to a spouse or partner do not count towards the threshold.
If the primary residence is left to a direct descendant such as a son or daughter, the tax-free threshold extends by another £175,000, totalling £500,000 – doubling to £1,000,000 for a couple.
Knowing the danger of not doing anything is the first tool in your possession, as it gives you an opportunity to enhance your knowledge and seek solutions.
Related: A SHORT GUIDE TO INHERITANCE TAX
2. Consider setting up a Trust
A popular way to reduce your inheritance tax bill is to use a Trust. Trusts are designed to protect your assets from taxes and creditors while allowing you to benefit from them during your lifetime. Assets placed in Trusts are classed as outside of your estate after 7 years, meaning they will be exempt from inheritance tax after that period.
The trustees serve as the legal owners of the trust assets, wielding effective control over them. On the other hand, the beneficiaries, acting as beneficial owners, possess rights against the trustees. Although these rights grant the beneficiaries complete authority to enforce the trust in their favour, one advantage lies in that a specific beneficiary is not deemed an owner or controller of the assets. This characteristic proves highly beneficial in the realms of tax and estate planning.
Related: WHAT IS A TRUST
3. Make use of your annual gift allowance
Thirdly, gifting is also a great way to reduce your estate’s tax liability. You can give away up to £3,000 yearly without incurring inheritance tax. If you do not use the full £3,000 in one year, you can “carry forward” the remainder and gift up to £6,000 in the following year. Furthermore, gifts made to charities and political parties are entirely exempt from inheritance tax.
One thing to remember when deciding on this type of IHT mitigation strategy is that the amount you can ‘reduce’ is relatively small. One must also remember to record all dates and amounts as evidence of what was given, as they will be needed for the beneficiaries to prove receipt and be granted the IHT reduction. It is important to consider that in order for these gifts to be excluded from the taxable estate, the donor must survive for a minimum of seven years after making the gift.
4. Business Relief
Investing in Business Relief Qualifying assets can also be an effective way of mitigating inheritance tax. Business Relief is available for business owners and investors who hold qualifying assets, such as shares in unquoted or AIM-listed companies.
Once you have owned Business Relief qualifying shares for at least two years, they can be passed on to your loved ones, ensuring a smooth transition of wealth, all while being exempt from Inheritance Tax upon your death. This allows you to secure your financial legacy and provide peace of mind for your family’s future.
5. Soteria Trusts IHT Planning Service
Finally, it is vital to seek professional advice to ensure your estate is set up in a tax-efficient manner. At Soteria Trusts, we pride ourselves on our expertise and our range of services that can help you transfer your wealth effectively and efficiently.
Our Soteria Trusts IHT Planning Service offers estate planning solutions starting with Will Writing, Lasting Powers of Attorney, and Tax Planning, and after a thorough analysis of your situation, recommended solutions that can include QNUPS, Family Investment Companies, bespoke Trusts, Business Relief, and many other tailored approaches.
Inheritance Tax can be managed and mitigated with the right tools and advice. Like any other challenge, the first part of remedy is recognising there is a problem, so don’t put it off until it’s too late. Subsequently, undergo an IHT analysis, and if there is a liability lurking for your estate, develop a plan that confronts it and then eradicates it. The importance lies in planning ahead to ensure your and your family’s future is secure. Contact Soteria Trusts today and start protecting your assets.
