Inheritance Tax (IHT) looms large for many families, potentially taking a significant portion of what you leave behind for your loved ones.

Understanding how it affects your estate and employing strategies to mitigate its impact are crucial steps in estate planning.

Here are three reasons Inheritance Tax could affect your family and practical advice on how to minimise its impact.

Reason 1: Your estate exceeds the nil-rate band

The nil-rate band is the threshold above which Inheritance Tax applies.

For individuals, this stands at £325,000.

Estates valued above this amount are subject to a 40 per cent tax rate on the excess.

For married couples and civil partners, any unused threshold can be transferred to the surviving partner, effectively doubling the threshold to £650,000.

How to stop it: Gift assets during your lifetime.

You can give away £3,000 (£6,000 if you act before April 2024) annually without it being added to the value of your estate.

Consider larger gifts too – these are potentially exempt from IHT if you live for seven years after making the gift.

Establishing a trust can also be a savvy move, as certain types can help reduce your estate’s value for IHT purposes.

Reason 2: The residence nil-rate band doesn’t apply

The residence nil-rate band is an additional IHT threshold available if you leave your main residence to direct descendants, including children or grandchildren.

This is on top of the standard nil-rate band (mentioned above) and currently stands at £175,000 per person.

However, estates valued over £2 million see this allowance taper away, reducing by £1 for every £2 over this threshold.

Again, this can be passed to your spouse taking their IHT threshold to £1 million.

How to stop it: Downsizing or gifting part of your estate earlier can help keep the total value below any thresholds, ensuring the residence nil-rate band applies.

Additionally, consider redistributing your assets to balance between partners, making full use of each individual’s allowance.

Reason 3: Non-exempt gifts increase your taxable estate

Gifts made within seven years before your death that exceed the annual exemption of £3,000 are added back into the estate for IHT purposes.

This can significantly increase the value of your estate and the corresponding tax liability.

How to stop it: Plan your gifts carefully.

Use the annual exemption and other exemptions, such as wedding gifts or small gifts of up to £250 per person, to reduce your estate’s value.

Regular gifting from excess income can also be exempt, provided it doesn’t affect your standard of living.

Keeping detailed records of these gifts can prove their exemption eligibility.

Why you should speak to an accountant

Inheritance Tax can significantly impact your family’s inheritance, but with careful planning and strategic gifting, you can reduce or even eliminate its effect.

Consulting with an accountant can provide personalised advice tailored to your unique situation, ensuring your assets pass to your loved ones as efficiently as possible.

Staying proactive about your estate planning can secure your family’s financial future and provide peace of mind that your wishes will be honoured.

To speak to an accountant and reduce your IHT, please get in touch.