Metis AM
According to FTAdviser, a staggering £7 trillion is expected to transfer between generations in the UK over the next 30 years. This is known as the “Great Wealth Transfer” and is predicted to become the largest intergenerational transfer of wealth in UK history.
While this wealth transfer may present opportunities for financial security, it could also lead to unforeseen complications within families. Conflicts over expectations, confusion over the distribution of assets, and even varying risk tolerances can all become sticking points where inheritance is concerned.
Particularly, the implications of Inheritance Tax (IHT) are important aspects to consider when navigating this transfer of wealth. Understanding IHT allowances and how they apply could help you pass on your wealth more effectively to future generations.
Here’s what you need to know about The Great Wealth Transfer, IHT, and leaving a legacy to your loved ones.
Inheritance Tax could reduce how much wealth you pass down
IHT can have a significant effect on the amount of wealth you pass on to your loved ones. Understanding what the current IHT landscape looks like, and how it’s set to change, is important for effective estate planning.
As of the 2024/25 tax year, the nil-rate band, which shields your estate from IHT up to a certain amount, is set at £325,000. The residence nil-rate band, which may apply to your estate if you are passing your main home down to direct descendants, is currently £175,000 – meaning the maximum amount an individual can pass down tax-efficiently stands at £500,000.
These bands are fixed until 2030, extended from 2028 in the Autumn Budget.
If you’re married, you can combine your allowances with your partner, effectively achieving a combined £1 million nil-rate threshold. Anything above these individual or combined allowances could levy an IHT charge of 40%.
Understandably, one of your primary concerns regarding The Great Wealth Transfer may be the amount of IHT that your loved ones could pay after you pass away, especially since the nil-rate bands are now fixed until 2030.
Over time, you might accumulate more wealth than expected through investments, savings, or even business ownership, and house prices could rise significantly. These could all push your estate’s value above the frozen IHT thresholds and result in your loved ones paying more IHT than expected.
4 key strategies to help minimise your Inheritance Tax liability during the Great Wealth Transfer
There are several strategies you could use to mitigate how much IHT your beneficiaries may have to pay, where possible.
This could help ensure a smoother wealth transfer that benefits your loved ones, and may even reduce the chance of disputes and confusion happening down the line.
1. Lifetime gifts could help reduce your estate
Making gifts during your lifetime could reduce the portion of your estate that becomes subject to IHT after you die.
As of the 2024/25 tax year, you have an annual exemption of £3,000, meaning you can give away up to this amount each year without a potential IHT charge being applied in future.
However, you need to be mindful of the seven-year rule, which states that gifts above the annual exemption, made up to seven years before your death, may still be subject to IHT.
This said, there is taper relief available, meaning the closer you are to the seven-year cut-off, the less IHT there is to pay.
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.
So, with lifetime gifts – especially those that fall within your annual exemption – you could offer cash, investments, and property to your loved ones and mitigate IHT in the process.
A financial adviser can help you work out a gifting strategy that aligns with your goal to diminish your IHT liability while maintaining financial stability during your lifetime.
2. Gifting from surplus income could help support ongoing costs for your family
With a “gifting from income” strategy, you can sometimes make regular gifts from your surplus income to your family, which essentially removes this wealth from your estate and potentially reduces IHT.
To qualify, these gifts must be seen by HMRC as normal and regular payments. They must also be made directly from your income after tax and must not affect your standard of living.
Examples of gifts of this variety could include a monthly contribution to your child’s rent or mortgage, nursery fees for grandchildren, or a fixed monthly payment that supports a loved one’s standard of living.
3. Family trusts could help distribute your wealth tax-efficiently
Trusts can be a helpful tool for managing and distributing your wealth while mitigating IHT.
In essence, a trust is a legal arrangement where you transfer assets (such as property, cash, or investments) to designated trustees. These trustees then hold and manage those assets for the benefit of the beneficiary.
There exists a variety of trusts, each with specific rules and benefits, so figuring out which may be right for you and your family usually requires bespoke advice.
Crucially, trusts are normally subject to a reduced rate of IHT, potentially mitigating the overall bill that your loved ones pay after you pass away.
Keep in mind that setting up and managing a trust can involve additional costs and they may have their own tax rules, including potential tax charges on the trust itself. Consult with a financial adviser to decide if this is the right option for you.
4. Business Property Relief could help minimise your Inheritance Tax liability but consider recent changes carefully
Business Property Relief (BPR) could be a useful way to reduce your IHT liability if you own a family business or have investments in qualifying companies. However, there are some eligibility criteria to consider. BPR was also recently amended in the 2024 Autumn Budget, which may affect your IHT plans.
Currently, to be eligible, you must have held the business assets for at least two years and 100% IHT relief only applies to certain qualifying assets, such as shares in unquoted companies. You will normally receive 50% relief for other assets, such as land and buildings or equipment used in the business. Remember, businesses that are eligible for Agricultural Relief don’t normally benefit from BPR.
However, from 6 April 2026, 100% Business Relief will be capped at the first £1 million of qualifying assets. For assets exceeding this threshold, relief will be reduced to 50%. Additionally, BPR qualifying shares on the AIM stock market will only receive 50% relief.
BPR may be a useful way to reduce your taxable estate, but these changes could have a significant effect on your financial strategy. That’s why it’s crucial to review your estate plan and explore strategies to mitigate the effects of these reforms with the help of your adviser.
Proactive planning and communication could help you prepare for the Great Wealth Transfer
Open communication and proactive planning are essential when navigating the complexities of IHT and the transfer of wealth.
When it comes to family conversations, be open and honest about your estate plan, financial goals, and your wishes. For instance, you could discuss your intentions with your beneficiaries, ensuring they understand your plans and the reasons behind them. This could help prevent misunderstandings and family disputes after your death.
An important part of preparing to transfer wealth may also involve writing a will, which clearly stipulates how you want your assets to be distributed.
Finally, starting your inheritance plan early can be a big advantage, as it could help you understand your existing estate, how it may grow, and its potential IHT liability.
This is something a financial adviser can help you with. We’ll assess your estate and potential liabilities. Then, we can discuss suitable estate planning strategies with you and help ensure that your plan stays aligned with your goals.
Get in touch
Whether you’re just starting out with your estate plan or want to review your potential IHT liability, we’re here to help.
Email enquiries@metiswealth.co.uk or call 0345 450 5670 today to find out what we can do for you.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
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.
The Financial Conduct Authority does not regulate estate planning, tax planning, will writing, or trusts.
