Making a plan to protect your family wealth

Inheritance Tax has something of an image problem.

It is often referred to as the most hated tax of all – most likely because it is effectively seen as a double tax as it applies to a person’s wealth even though they have already paid tax on their earnings.

It can also bring an additional level of stress at a time when a family least need it, not least because the high rate of IHT can come as something of a shock for those that have not previously taken steps to mitigate their potential liabilities.

The reality is that once the tax-free allowance of £325,000 – known as the nil-band rate – is taken into account, only a relatively small amount of people will actually pay any IHT and yet it still generated more than £3bn receipts for the Revenue in the third quarter of 2021, according to its latest available figures.

While the numbers that pay it are relatively low, IHT is the one tax that can potentially impact everybody and with IHT currently at 40%, it is certainly not a tax to be ignored. 

The good news is that IHT is in many ways a voluntary tax because of all the actions that can be considered to potentially negate it – with estate planning opportunities in every tax year that can be considered by those looking to minimize exposure to IHT and plan an effective estate distribution strategy.

The key to mitigating IHT is effectively creating a strategy where you can pass on your wealth in the most tax efficient way possible and one of the options to consider – particularly as we approach the end of the current tax year on April 5th – is through gifting.

There are various rules and limitations to what can be gifted, in what form, how and to who but there are a range of gifts that are completely exempt from IHT and with no survival window – meaning they will immediately be considered outside of your estate.

These include gifts to spouses and civil partners, small gifts of £250 and most importantly, an annual exemption of £3,000 per person or £6,000 between you and a partner every tax year.

This can also be carried forward for one year so the combined total could be as much as £12,000. 

Another option for passing on wealth in a potentially efficient way is via your pension, which are invariably held outside of an estate. With an annual limit of £40,000, paying any excess cash into your pension before the end of the tax year not only minimises your taxable estate but ensures that your money is working harder for you and your family.

There are a number of other options to consider when passing on wealth, not least trusts, which come in many forms but are principally used to provide a means of gifting whilst maintaining some control.

Advice here is important so the rules can be carefully managed and adhered to but also so you can truly consider the wide range of factors such as who the beneficiary and beneficiaries are, how and when they would like them to benefit from the trust and the level of control retained of the gifted asset.

So while IHT may be one of the more unpopular taxes, it can also be minimised through some forward-thinking and by taking advantage of the opportunities available every tax year.  

Start planning now as there will be a time when it will be too late to make a difference and unfortunately none of us know when that might be.

The Partner Practice is an Appointed Representative of and represents only St. James's Place Wealth Management plc (which is authorised and regulated by the Financial Conduct Authority) for the purpose of advising solely on the group's wealth management products and services, more details of which are set out on the group's website The 'St. James's Place Partnership' and the title 'Partner' are marketing terms used to describe St. James's Place representatives.

Penney Financial Partners is a trading name of Penney Financial Partners Ltd. Penney Financial Partners Limited is registered in England and Wales, Number 09964340. Registered Office: Kensington House, Knights Way, Battlefield, Shrewsbury, Shropshire, SY1 3AB, UK