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4 factors to consider if you plan to leave property to your children as a high net worth individual
26.09.2024Discover 4 key factors to consider when passing on wealth that could help minimise a potential Inheritance Tax bill.
Passing your hard-earned wealth on to the next generation is a goal that many strive towards.
And, if you’re a high net worth (HNW) individual, there’s a good chance that property makes up a significant percentage of your estate. In fact, FT Adviser reveals that half of HNW individuals who plan to leave an inheritance to their children intend to pass their homes on as part of this.
However, the rising cost of homes, combined with the frozen Inheritance Tax (IHT) nil-rate bands, could mean that your beneficiaries face a substantial tax bill when you pass away.
It’s vital to consider factors like this beforehand if you wish to leave your property to your children, so you can ensure they inherit as much of your wealth as possible. Continue reading to discover four of these key factors that you may want to think about.
1. Frozen Inheritance Tax nil-rate bands might mean your loved ones face a tax bill
You likely know that if the value of your estate is below the nil-rate band – which stands at £325,000 in 2024/25 – then your loved ones typically won’t have to pay any IHT when you pass away.
Furthermore, if you leave your primary home to a direct lineal descendant, including stepchildren, foster children, and adopted children, you can benefit from the additional residence nil-rate band. This stands at £175,000 in 2024/25, bringing your total IHT-free allowance to up to £500,000.
However, it’s important to be aware of the residence nil-rate “band taper”. If your estate’s value exceeds £2 million, the residence nil-rate band is typically reduced by £1 for every £2 by which the estate exceeds this threshold.
This means that your residence nil-rate band could disappear entirely if your estate is calculated as being worth £2.35 million or more.
As an example, imagine a man who passes away in 2024/25 and has never been married. His default residence nil-rate band would be £175,000, but the total value of his estate is £2.5 million. So, due to the taper, his adjusted residence nil-rate band is £0. This could be an issue for you as a HNW individual.
Furthermore, the Conservatives froze these thresholds until at least April 2028. While the Labour Party has recently come into power, their manifesto did not mention IHT, so these freezes may remain in place.
This could mean that more estates are dragged over the threshold at which IHT kicks in while the value of assets continues to increase. In fact, IFA Magazine reveals that IHT receipts reached a new record of £7.5 billion in the 2023/24 tax year.
The threshold freezes no doubt contribute to this, while another factor is that house prices have been on the rise in the UK. Data from the UK House Price Index shows that the average house price in May 2024, when data was last available, was £285,201.
This also depends on where you live, with average prices in London reaching £523,376 in May 2024. That would see you use both your nil-rate bands on your property alone.
If the value of your home uses up much of or even exceeds the frozen thresholds, this could increase the potential IHT bill your loved ones may have to pay on your estate after you pass away.
2. You could pass on up to £1 million Inheritance Tax-free as a couple
If you’re married or in a civil partnership, you could potentially benefit from a combined nil-rate band of £1 million.
You or your spouse or civil partner can inherit one another’s unused nil-rate bands when one of you passes away. This essentially doubles your nil-rate bands, resulting in an IHT-free threshold of up to £1 million that you can pass on between you.
So, although the value of your property might exceed your individual nil-rate bands, it could still be possible to pass it on tax-free when you calculate your thresholds alongside your spouse or civil partner.
3. Gifting and trust strategies could help you lower the value of your estate
One option to consider that could help mitigate a potential IHT bill is to gift other money and assets during your lifetime.
This could be a highly effective way to reduce the value of your estate and potentially lessen the IHT your loved ones pay after you pass away. Although you may not be able to reduce the value of your property, giving away other assets such as money or investments could bring the total value of your estate below the nil-rate bands.
However, it’s crucial to be aware of the potential tax implications of gifting, as the rules are complex. It can be important to seek professional advice, as making mistakes with gifting could result in an unexpected bill for your loved ones when you pass away.
Trusts can also be useful tools for mitigating a potential IHT bill. These are legal arrangements where you essentially hand your assets to someone else so they can look after them for the benefit of your loved ones.
Since these assets no longer belong to you, their value normally isn’t counted as part of your estate when calculating IHT.
However, there may still be IHT involved with setting up trusts for tax purposes. It’s worth seeking professional help first.
4. Specialist advice can help you mitigate a tax charge
Given the complexities of managing IHT as a HNW individual, seeking professional advice is prudent.
Specialist advice from a financial planner will help you understand your unique situation exactly. A planner could then assist you in understanding your options, and create a plan tailored to your personal circumstances.
By assessing your assets now, they could determine the most suitable ways to mitigate the risk of significant IHT bills for your loved ones.
To find out how our specialist advice could help you leave your property to your next of kin and mitigate as much IHT as possible, email us now at: advise-me@fosterdenovo.com or call us on 0330 332 7866.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
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.
Taper relief does not reduce the value transferred; it reduces the tax payable as a consequence of that transfer.
The Financial Conduct Authority does not regulate estate planning or tax planning.
Sources: https://ifamagazine.com/the-inheritance-tax-timebomb-half-of-hnws-plan-to-leave-houses-to-children/
