4 smart strategies to maximise the legacy you leave for your beneficiaries

Ensuring your estate is sufficient to support your beneficiaries after you die is likely a key component of your financial plan. Regularly reviewing and updating your estate plan helps ensure it aligns with your current wishes, assets, and any tax reforms.

The Labour government’s Autumn Budget introduced significant Inheritance Tax (IHT) reforms, including:

Freezing the nil-rate bands until 2030
Making pensions subject to IHT
Modifying Business and Agricultural Reliefs so that the first £1 million of combined business and agricultural assets will continue to attract no IHT, while for assets above this threshold, IHT will apply with 50% relief.

These changes have important implications for estate planning.

A report in the Times found that around 4% of estates currently pay IHT, though this figure could rise to around 7% by 2030 due to the recent reforms.

Reviewing your estate plan now can help you address these changes and minimise your IHT liability, ensuring more of your wealth is preserved for your loved ones.

So, read on to discover four smart strategies to maximise the legacy you leave for your beneficiaries.

1. Make the most of your nil-rate bands

For the 2024/25 tax year, the first £325,000 of your estate is exempt from IHT – this is your “nil-rate band”.

Crucially, there is an additional £175,000 tax-free allowance if you leave your primary residence to direct descendants (children, stepchildren, adopted children, or grandchildren). This additional allowance is known as the “residence nil-rate band”.

By combining the nil-rate band and the residence nil-rate band, you can pass on up to £500,000 in assets (including property) free from IHT.

If you’re married or in a civil partnership, any assets you leave to your spouse or partner are also exempt from IHT. Additionally, the surviving spouse can inherit any unused nil-rate bands, potentially allowing you and your partner to collectively pass on up to £1 million without incurring IHT.

So, by ensuring you leave your main residence to your direct descendants and combine nil-rate bands with your spouse or civil partner, your beneficiaries could inherit a larger portion of your estate.

2. Give gifts

Giving gifts can be an effective strategy for reducing your estate’s IHT liability.

For the 2024/25 tax year, you can gift up to £3,000 without the value of the gifts being added to your estate. This is known as your “annual exemption”.

Additionally, if you don’t use your full annual exemption in a single tax year, you can carry over any unused portion to the next year.

Other gifts that are exempt from IHT include:

Gifts to spouses or civil partners, provided you both reside in the UK.
Wedding gifts, with tax relief based on your relationship to the recipient. Parents or stepparents can give up to £5,000, grandparents up to £2,500, and friends or other relatives up to £1,000.
Charitable donations. Gifts made to charity are IHT-free, and giving at least 10% of your net estate to charity usually reduces your IHT rate to 36%.
Gifts from income. You may be able to gift from income provided the gifts are regular, made from income (not capital), and do not adversely affect your standard of living.
Small gifts of up to £250, with no limit on the number of small gifts you can give, as long as they are not part of a larger gift and the recipient has not received a gift from you under another exemption or allowance.

If you give a gift worth more than the annual exemption and it doesn’t fall into one of the above categories, it may be considered a potentially exempt transfer (PET).

If you die within seven years of giving the PET, IHT may apply but at a reduced rate based on how long you survived, known as “taper relief”.

If you survive for seven years, the PET usually falls outside your estate for IHT purposes.

By gifting during your lifetime, you can help reduce the size of your estate and potentially lower the IHT burden on your beneficiaries.

3. Establish a trust

When you transfer assets into a trust, they are usually no longer considered part of your estate for IHT purposes, provided the transfer meets certain conditions.

If you die within seven years of establishing the trust, it may be liable for IHT with taper relief.

There are various types of trusts, each with their own set of rules, management costs, and tax charges.

So, while placing assets in a trust can help reduce your IHT liability, it’s a good idea to speak with a financial planner before doing so. They can help you choose the most suitable trust for your goals, ensuring that the benefits align with your estate planning needs and the interests of your beneficiaries.

4. Invest in protection

When you have a life insurance policy in place, your beneficiaries will typically receive a payout upon your death, helping ensure they’re financially protected.

Indeed, the right policy could even cover the remainder of your IHT bill after your allowances, reliefs, and trusts have been accounted for. While this doesn’t mitigate the IHT payable, it could assist your loved ones in paying a bill quickly without having to use other assets within your estate.

You must write the life insurance policy in trust to ensure the payout is not subject to IHT, as otherwise it may be included in your estate for tax purposes. You might want to speak to a financial planner before taking out cover so that you can be certain you have carried this out as tax-efficiently as possible.

There are various life insurance policies available, and a financial planner can also assist you in choosing the best one for your circumstances.

Get in touch

A financial planner can help you create a tax-efficient estate plan, ensuring your legacy continues to support your beneficiaries after you’re gone.

To speak to a financial planner, get in touch.

Email [email protected] or call us on 01625 466360.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.

Remember that taper relief only applies to gifts in excess of the nil-rate band. It follows that, if no tax is payable on the transfer because it does not exceed the nil-rate band (after cumulation), there can be no relief.

Note that life insurance plans typically have no cash in value at any time and cover will cease at the end of the term. If premiums stop, then cover will lapse.