How to stay ahead in Inheritance Tax Planning?
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.
With the ever-changing rules surrounding inheritance tax, you may feel confused as to how you can actually prepare for what some people call the ‘death tax.’ With news such as Chancellor’s Rishi Sunak plans to increase inheritance tax to offset the cost of the Covid-19 pandemic on the UK’s economy, combined with rising UK house prices, steps to reduce inheritance tax are no longer a consideration for the wealthiest, it is now a real concern for almost everyone.
Currently, you will pay a 40% Inheritance tax on your estate, such as property, money and all other possessions, if it’s worth more than £325,000. The IHT is charged when you die, so in reality, it’s your beneficiaries, such as children, who will be burdened with this tax.
If you suspect that your estate will exceed £325,000, you should take some steps to ensure that what you own goes to the ones you love, not the taxman.
Estimate the value of your estate
First, you should determine whether your estate will be exposed to inheritance tax. Remember that your estate includes any property, life insurance policies not written in trust, investments, cash, collectables, jewellery and even your business(es). You can use our IHT Calculator to estimate your estate’s value. The calculator also takes into account the additional nil-rate band if you are married or in a civil partnership, which you can transfer to your spouse or partner when you die, tax-free. The nil-rate band for IHT then increases to £650,000 (2x £325,000).
It is a good practice to also assume the property value increases over the years or your investment gains over the years. While our online calculator doesn’t do it, all aspects of Estate and Inheritance Tax Planning will be considered when you meet with an advisor.
Planning ahead can reduce your Inheritance Tax bill
Planning your inheritance tax in advance can help you legally minimize this liability. The most important step is to understand IHT and its rules. With careful planning ahead, you can utilize tax benefits given to you by the HMRC to reduce your estate’s value legitimately.
Gifts and Residential Nil Rate Band
Gifts, an additional residential nil rate band of £175,000 if the property in your estate is your main residence and being passed on to your children, and charitable donations are among these tax benefits you can use to reduce this tax. However, the annual exemption for gifts is capped at £3,000, and you need to survive for 7 years after the gift is made, making it a solution for those who don’t have such a large IHT liability and are relatively in good health/not too old.
If you take this route, you and your executors/beneficiaries should keep records of the gifts given, so they can then report them and obtain the inheritance-tax exemption.
Related reading: How much can you inherit without paying IHT in the UK?
Business Relief Account, Trusts and QNUPS
Moreover, the use of Trusts, Business Relief Accounts and QNUPS, also referred to as ‘Property Pensions’, can reduce your IHT bill legitimately. However, as you will see, to reap the full benefits of these solutions, one has to do it in advance. This is just another reason why you should plan for the IHT in advance.
When you open up a Trust, you can protect your assets by allowing a third party, also called a Trustee, to hold and direct your assets in trust on your behalf or named beneficiaries. Because the assets are legally held in the trust, they no longer belong to you; therefore, they are not counted as part of your estate. Trusts are completely safe, and Trustees are obliged to act in your favour and according to your instructions (subject to the trust deed and trust type).
When we discuss trusts in Inheritance Tax planning, we can discuss two types of them:
- Trust Account
- QNUPS – Qualifying Non-UK Pension Scheme
Trust Accounts
People use trusts for other reasons, such as avoidance of probate or for family reasons. However, trusts are most often used in Estate Planning, of which IHT is a big part. You can use a trust account (which is not a QNUPS) to minimize your IHT bill in multiple ways.
For example, you can contribute the nil-rate band of up to £325,000 tax-free into a trust every seven years, and it will not be included in your taxable estate. However, trusts are a complicated matter, and any potential use of them should be thoroughly discussed with your advisor before taking any action.
A life Insurance policy held in trust is another way some people deal with the rising IHT bills. The life insurance policy should cover the potential IHT bill, and by being held in trust, your beneficiaries can access it to pay the Inheritance Tax tax-free.
QNUPS to reduce Inheritance Tax
QNUPS can benefit anyone with UK-sited assets, such as property, investments, art, jewellery, stocks, cash, and wines. Besides providing you with retirement income, the QNUPS also makes provisions for your loved ones by being tax-efficient. Tax efficiency is achieved because of the IHT initiatives granted by HMRC. QNUPS can operate from multiple jurisdictions, such as Hong Kong, Gibraltar or Guernsey, and they can offer further tax incentives and flexibility due to the utilization of these jurisdictions’ double tax agreements with the United Kingdom.
QNUPS, or the ‘Property Pension’, is a topic on our monthly education webinar, called UK PROPERTY & TAX SEMINAR. We host it every first Thursday of the month. During the seminar, you will learn about the Soteria Property Pension and how best to avoid IHT pitfalls and benefit from tax allowances. We welcome you to register for it.
Inheritance Tax Planning Service Guide
Download Soteria’s IHT Planning Guide for more information and real-life examples of IHT mitigation success stories.
