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How to save £264,800 of inheritance tax (IHT) in 4 minutes

By David Norton - June 10, 2020

£5.5 trillion is expected to pass between generations between 2020 and 2047.

Write a cheque today and make your inheritance a gift.

Sounds easy, doesn’t it? 

That’s because it is. 

The most difficult part of saving this huge sum...

Is picking your beneficiaries

To most of us, £264,800 is a lot of money.

To save your loved ones from having to pay it to the UK taxman...

Here’s what you need to do...

Use the magic number £662,000 when writing your cheque.

This is the amount couples can give away now to save on IHT.

(Assuming you have made no other gifts)

If you’re single, halve the number.

This of course halves the savings too...

However, it’s still a whopping £132,400 of tax saved in a matter of minutes.

For many reasons (including tax), it is also extremely important to ensure you make a Will.

Especially if you have children or family depending on you financially.

So, what are these UK estate planning tax breaks called?

It’s simple, combine your nil rate band (NRB) and annual gifting allowance.

Most people don’t do either.

But these actions are simple.

Taking just one of these tax-planning steps, can reduce your IHT liability significantly. 

If you are wary of writing a big cheque, try just the annual gifting allowance.

Let’s see how both these tax breaks work.

Nil rate band planning

UK nationals or UK property holders are entitled to give up to £325,000 away without incurring an inheritance tax charge.

If you give away more than £325,000 in the 7 years before your death, IHT applies.

Therefore, each person can make NRB gifts every 7 years.

Taken together, a couple could gift £650,000 today.

This would be outside their estate for UK tax calculations.

Our suggestion?

Consider giving away up to £325,000, now or in the future, each to your beneficiaries. 

This will mitigate any inheritance tax.

You can do this as a straight payment, or by placing the money into a Trust for children or grandchildren.

This assumes you have not made any large gifts within the last 7 years, which could affect how much you can gift to save estate tax.

Annual gifting allowance

Currently, individuals get an annual gifting allowance of £3,000.

If you haven’t used last year’s, this can be carried to the next UK tax year...

Meaning a gift of £6,000.

We suggest doing this each year, if you can afford to.

It’s a quick and easy exercise.

If you’re an expat, remember that each UK tax year runs from April 6th in one year, to April 5th of the following.

Each gift needs to be made within this time.

Here’s how we calculated £264,800 of tax savings for a couple.

Remember to halve the amounts for individuals.

Current NRB allowance: £325,000 x 2 (for a couple) = £650,000

Plus gifting allowance of £3,000 each year, so £6,000 if not used x 2 (for a couple) = £12,000

So, £650,000 + £12,000 = £662,000 is the amount to write that cheque for meaning...

With the current IHT rate of 40%..


An extra note: Residence nil rate band (RNRB)

This additional allowance was introduced in 2017 to recognise the rising property prices in the UK.

From April 2020, that allowance is £175,000 per person.

This allowance applies to those passing down property to children or grandchildren.

If you’re married or in a civil partnership, any unused threshold can be added to your partner’s threshold when you die. 

Which totals a tax-free threshold of..

£325,000 x 2 + £175,000 x 2 =  £1 million for your partner. 

However, the amount of RNRB starts to be withdrawn when the value of the estate immediately before death exceeds the £2 million taper threshold.

Once exceeded, RNRB reduces by £1 for every £2 of value.

Tapering can reduce RNRB to zero.

So, do you have 4 minutes to spare?

With careful planning, it’s possible to mitigate your IHT liability.

We understand that estate planning can be challenging.

If you would like advice tailored to your needs, get in touch today.

[Important notes: If you are uncertain of your tax allowances, you should consult a qualified financial planner or tax adviser. This blog is written with the assumption that you have not made any gifts that may make use of your current nil rate band or annual gifting allowances. If you have, the allowances should be proportionately adjusted to take account of this.]