How to pass on more of your hard-earned assets to your family

24 May 2019

How to pass on more of your hard-earned assets to your family

You’ve worked hard all your life. You’ve saved and invested wisely, and you have a nice little nest egg. Now, you want to make sure that your partner, children or wider family and friends benefit from the value of your estate when you die.

It sounds simple. However, Inheritance Tax (IHT) in the UK is currently charged at 40%, meaning the taxman can take a sizeable chunk out of your estate before your beneficiaries get their hands on it. According to the Office for Budget Responsibility, more than 24,000 estates find themselves in this position every year, paying a total of £5.2 billion in tax in 2017/18.

Careful financial planning and good advice can help you to ensure that your family receive as much of your estate as possible when you die. If you want to protect your assets on death, mitigating IHT is one aspect to consider.

The current Inheritance Tax rules

Inheritance Tax (IHT) is paid on the value of your estate when you die. There is normally no IHT due if:

  • The value of your estate is less than the threshold of £325,000
  • You leave everything above the £325,000 threshold to your spouse or civil partner
  • You leave everything above the £325,000 threshold to a charity

If, on death, you pass your home to your children or grandchildren, you benefit from an additional £150,000 allowance (rising to £175,000 in 2020/21).

If you are married or in a civil partnership and your estate is valued below the threshold, you can pass this to your spouse or civil partner when you die. This means that their threshold could be as high as £950,000. Remember that unmarried couples can’t benefit from this transfer of allowance, even if you have children.

Inheritance Tax is paid at a rate of 40% on the value of your estate above your threshold (or 36% if you gift at least 10% of your estate to charity). It must be paid within six months of your death.

As well as these allowances, there are other ways that you can protect your assets and/or mitigate the amount of Inheritance Tax that you pay. We’ll look at these next.

Reduce the value of your estate through gifts

Anything that you gift to your children or family is exempt from Inheritance Tax if you live for seven years after making the gift. If you don’t live for seven years, then some tax may be payable – this is called a Potentially Exempt Transfer (PET). The amount of tax that you pay reduces every year between years three and seven.

It’s important that you don’t benefit from any of the gifts you give away (for example, continuing to live in a property rent-free). If you do, your estate is still likely to be liable for IHT on the asset when you die.

You can gift up to £3,000 each year tax-free (your annual exemption) and all gifts up to the value of £250 are also exempt (as long as they are not gifted to the person to whom you gifted your £3,000 annual exemption).

You can also make an IHT-free gift to a child of up to £5,000 before their wedding, or to a grandchild of up to £2,500. Gift to charities, museums, universities and community sports clubs are also exempt from IHT.

If you can make gifts from surplus income when you are alive, then these may also be exempt from IHT – although the rules are complex.

Remember that you’ve worked hard across your lifetime to benefit from financial security in old age. While working hard to mitigate your IHT liability may be important to you, don’t leave yourself short of money simply to provide for someone else.

Trusts can help you to retain control – but they could cost you

Setting up a trust can be one way of retaining control over what happens to your assets when you die.

As the settlor of the trust, you decide how it should be run. When you die, the control passes to your nominated trustees who manage the assets on behalf of your beneficiaries.

Assets in trust don’t form part of your estate. This means that they won’t be included when calculating your IHT liability, as long as you live for seven years after placing the assets into trust.

Note: it’s a myth that assets in trust are exempt from IHT. There are some exceptions, and the type of trust determines how it is taxed.

As an example, the rules for a discretionary trust (one of the most commonly used for IHT planning) are:

  • You pay a 20% charge on assets you place into the trust, less any IHT allowance you haven’t used in the last seven years
  • Assets in the trust are revalued every 10 years, and you’ll pay 6% IHT on the value of your assets less your IHT allowance
  • Up to 6% IHT is paid when the trust is closed, or the assets removed

Life insurance can help to pay any IHT bill

Life insurance is an easy way to ensure the total value of your estate is passed to your beneficiaries when you die. While your estate may still have a tax liability, the proceeds of your life cover can help to pay the IHT bill, meaning your family will still inherit the value of your estate.

‘Whole-of-life’ insurance pays out on the event of your death. There are two main benefits to a whole-of-life policy:

  1. Proceeds of a whole-of-life policy don’t typically form part of your estate when you die, as long as they are correctly written in trust
  2. The premiums you pay for your whole-of-life insurance reduce the value of your estate now.

It’s important to consider writing your life insurance in trust, otherwise, the proceeds might simply add to the value of your estate (actually increasing the tax liability). There’s a wide choice of trusts available, so it can pay to take professional advice to make sure you achieve the outcome you want.

Placing your life insurance in trust also helps to ensure a quick payout, meaning that any tax bill can be settled within the requisite period.

Life insurance can also help you to protect any assets that you gift. If you die within the seven years after making a gift, there may be an IHT liability. A decreasing term assurance or ‘gift inter vivos’ policy can ensure there’s a lump sum available to meet any tax liability on a Potentially Exempt Transfer.

We can help you to protect your assets on death and to mitigate the effect of Inheritance Tax on your estate. Email info@lifetime.co.uk or call (01727) 848412 to speak to an expert.



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