Inheritance tax warning: Three overlooked steps which could considerably reduce your bill in 2025
3 overlooked steps which could considerably reduce your IHT bill in 2025
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As inheritance tax (IHT) receipts surge towards £8.5billion in 2024-25, families are increasingly seeking ways to reduce their tax burden.
HMRC figures show IHT collections are averaging £720million per month since April, up significantly from the £6.1billion collected in 2021-22.
With IHT thresholds frozen until 2030, more estates are likely to face substantial tax bills in the coming years.
Niki Patel, tax and trust specialist from St. James's Place highlights three often-overlooked strategies to GB News, that could help families minimise their IHT exposure.
These methods, ranging from annual exemptions to lifetime planning and deeds of variation, offer significant potential for tax savings when properly utilised.
With IHT thresholds frozen until 2030, more estates are likely to face substantial tax bills in the coming years
GETTYThe first key strategy involves maximising annual IHT exemptions, which Patel notes are frequently underutilised despite their significant potential.
Each individual can gift £3,000 annually, with the option to use the previous year's unused exemption.
Additionally, the small gifts exemption allows up to £250 to be given to any number of individuals, though this cannot be combined with other exemptions for the same person.
Regular gifts from surplus income are also permitted, provided they don't affect the donor's standard of living and proper records are maintained.
She said: "Planning in this area is often overlooked with few individuals using these exemptions to their full potential.
"Take the example of someone who has made use of their annual exemption over 20 years - £60,000 would have been gifted free of IHT, saving £24,000 in tax."
Lifetime planning represents the second key strategy, offering flexibility through outright gifts or trust arrangements.
Patel added: "The current regime for outright gifts is favourable, thereby providing scope for lifetime planning.
"In cases where an outright gift is not a suitable option, a trust can be used. There are many types of trusts available to suit individual needs and objectives.
"It is important that you seek advice to ensure you choose the option which is best for you."
This approach offers significant potential for effective inheritance tax planning when properly structured.
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The third strategy focuses on deeds of variation, particularly valuable for those who have inherited assets within the past two years.
This method allows inherited assets to be redirected for immediate IHT savings, whether received through a will or intestacy rules.
Patel explained that ordinarily, inherited assets will accumulate in the taxable estate of the receiving person who may not want or need the inheritance.
Instead of making a gift that requires seven years to become IHT-exempt, beneficiaries can use a deed of variation for immediate tax savings.
She said: "It is important to speak to a solicitor who will be responsible for drafting such a deed and ensuring all of the formalities are met."
The urgency of inheritance tax planning has been heightened by upcoming changes to pension regulations.
From April 2027, defined contribution pension pots will be included in inheritance tax calculations, as announced by Chancellor Rachel Reeves in the Budget.
These pension savings will be counted alongside property and shares as potentially chargeable assets when someone dies.
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