How to lessen the impact of a "double whammy" inheritance tax blow could befall you

Analysis indicates that thousands more estates will lose their residence nil-rate band as a result of frozen tax thresholds and pensions that are subject to inheritance tax

Within two years, the double inheritance tax (IHT) will hit thousands more estates, but there are ways to help your loved ones pay less.

According to recent research by wealth management company Quilter, the number of estates worth more than £2 million that will begin to lose their residence nil-rate band is expected to increase by 76% from 3,620 in 2023 to 6,400 by 2028.

Because IHT thresholds are frozen and pensions are subject to IHT starting in April 2027, this number will rise to over 16,000 by 2031. The value of people's estates will rise in tandem with rising housing costs.

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Start your trial If you are leaving your home to a child or grandchild, you will be subject to an additional 175,000, known as the residence nil-rate band, on top of the 325,000 or more that IHT is normally due on estates. If you pass away, your spouse may inherit this £175,000.

This implies that married or civilly partnered couples would not be subject to IHT if they left up to £1 million to their loved ones.

However, you lose one of this residence nil-rate band until it vanishes for every two times the value of your estate exceeds £2 million. This indicates that estates left by a single individual worth £235 million are exempt from the residence nil-rate band, whereas estates left by couples are £27 million.

According to Quilter, more estates will begin to lose this allowance because IHT tax bands will remain at their current levels until 2031 and pensions will be subject to IHT starting in April 2027.

Shaun Moore, a tax and financial planning specialist at Quilter, stated: "The double whammy of pensions being subject to IHT and frozen tax allowances is likely to affect many estates.

"With asset prices rising over the last ten or so years, many more are having to adjust their strategies in real time to help mitigate IHT and efficiently transfer wealth to future generations. IHT is already a devilishly complicated tax to navigate." The "

How to make your estate less than £2 million.

Since your estate is probably worth more than £2 million, you might want to make plans now to safeguard your wealth if you think you might lose all or part of your residence nil-rate band.

First. giving gifts.

Each tax year, you can donate up to £3,000 without having it added to the value of your estate. You can also donate up to £5,000 to a person getting married or forming a civil partnership.

Gifts worth up to 250 can be given to as many people as you like each tax year, so if you have eight grandchildren, you could give them 250 each and remove 2,000 from your estate.

However, you cant use this allowance if youve used another allowance on that person. Therefore, you couldn't give someone a gift of £250 and another gift of £3,000 in a single tax year and still be eligible for the annual allowance and small gift.

It is also possible to donate an unlimited amount of money, and if you survive for seven years after making the donation, your estate will not be subject to IHT.

Moore said: "Lifetime gifting remains one of the most reliable ways to bring an estate back below the threshold."

In order to facilitate your executors' disclosure of any gifts to HMRC, it is crucial that you maintain documentation of the dates and amounts of your gifts.

Two. giving to charities.

The value of your estate is deducted from charitable contributions made in your will before IHT is determined.

Your total IHT rate will drop from the usual 40 percent to 36 percent if 10 percent or more of your estate is given to charity.

Three. reduction in size.

To reduce the value of your estate, you can move to a less expensive house and release some of the equity that is locked up in your current residence.

To truly decrease the size of your estate, you will need to spend or give away this equity; however, keep in mind that the seven-year rule might be applicable if you are donating funds outside of your allowances.

Additionally, there are moving-related expenses to consider, such as surveys, estate agent fees, and paying removal companies.

"Options like downsizing later in life can help, provided people understand what they can afford to give away and when," stated Rebecca William, divisional lead for financial planning at wealth management firm Rathbones. A "

4. . Take your pension money away sooner.

You might want to begin taking withdrawals from your pension or take your tax-free lump sum sooner than you had intended in order to release funds from your estate because pensions are subject to IHT as of April 2027.

Just be sure you have a plan in place so you won't have to pay out of pocket when you retire.

If you intend to withdraw your pension early, keep in mind that tax-free lump sums cannot be added back to your pension once they have been taken out.

Fifth. onshore securities.

If given to a family member, onshore bonds written in trust can be a useful tool for lowering your future IHT liability.

No IHT will be due as long as the giver lives for seven years.