How to structure your Will for IHT efficiency
When it comes to safeguarding your family’s financial future, crafting an Inheritance Tax (IHT) efficient Will is of paramount importance.
Many people underestimate the impact that IHT can have on their estate, often assuming their loved ones will simply inherit everything seamlessly.
However, failing to structure your Will in a tax-efficient manner can result in a significant portion of your hard-earned assets going to the taxman, rather than your intended beneficiaries.
This can leave your family with a financial burden at an already emotionally challenging time.
Utilising trusts
One of the most effective ways to make your Will tax-efficient is by using trusts.
A Discretionary Trust, for example, allows you to allocate assets to a group of beneficiaries without specifying how much each individual receives.
This gives the trustees discretion to make distributions based on need, thereby optimising the use of each beneficiary’s tax-free allowance.
Life Interest Trusts, on the other hand, are IHT efficient because they allow the settlor to provide for a ‘life tenant,’ usually a spouse, without the assets becoming part of the life tenant’s own estate for IHT purposes.
Upon the life tenant’s death, the assets pass directly to the remaining beneficiaries, often children, thereby utilising multiple Nil-Rate Bands and reducing overall IHT liability.
Leveraging the nil-rate band
The Nil-Rate Band (NRB) is the threshold below which an estate has no IHT liability.
For the tax year 2023, the NRB is £325,000 per individual.
If you’re married or in a civil partnership, any unused NRB can be transferred to your surviving spouse, effectively doubling the threshold to £650,000.
Structuring your Will to make full use of the NRB can result in substantial tax savings.
Residence nil-rate band
In addition to the NRB, there’s the Residence Nil-Rate Band (RNRB), which applies when you leave your main residence to direct descendants.
For the tax year 2023, the RNRB is £175,000 per individual.
Like the NRB, any unused RNRB can be transferred to a surviving spouse meaning that the total sum you could pass down would be (£325,000 x 2) + (£175,000 x2) = £1 million.
This should highlight the importance of structuring your Will and ensuring that your beneficiaries receive the highest amount possible upon your death.
Gifting assets
Another strategy is to gift assets while you’re still alive, although this could incur Capital Gains Tax (CGT) liabilities.
Potentially Exempt Transfers (PETs) become entirely free from IHT if you survive for seven years after making the gift so it is important to do this early.
These gifts must be made judiciously to avoid losing control over your assets and ensure they are CGT and IHT efficient.
It is best to discuss these matters with a qualified accountant before proceeding.
Business relief
If you own a business, you may also be eligible for Business Relief, which can reduce the value of the business or its assets that are being passed down when working out how much IHT must be paid.
You could get either 50 or 100 per cent relief depending on the type of assets you are leaving in your Will.
Again, it is best to discuss business relief with an experienced financial professional.
When to see an accountant
A well-structured Will is an invaluable tool for minimising your estate’s IHT liability.
By utilising trusts, taking advantage of tax-free allowances, and making strategic gifts, you can ensure that your loved ones receive the maximum benefit from your estate.
Consulting a tax advisor or accountant with expertise in estate planning is highly recommended as they can tailor a strategy to best suit your individual circumstances.
Speak to Moore Thompson to find out how we can make sure your inheritors receive the maximum possible amount of your estate IHT free.