How to Shield Your £1 Million Estate After the Budget Blow
The government’s recent budget has left many families fearing a significant blow to their financial legacy. With inheritance tax (IHT) rules feeling increasingly unforgiving, you might be wondering how to protect the wealth you’ve worked so hard to build. The good news is that with proactive planning, it’s possible to legally shield assets worth up to £1 million from the taxman.
Navigating the complexities of estate planning can feel overwhelming, especially when faced with alarming headlines. At Soteria Trusts, we understand these concerns. Our role is to bring clarity and reassurance, helping you implement strategies that secure your family’s future, regardless of fiscal policy changes. Let’s cut through the jargon and explore the practical steps you can take today.
Doubling Down: How Couples Can Pass on £1 Million Tax-Free.
A common myth is that inheritance tax is unavoidable. However, the tax code provides some generous allowances that, when used correctly, can make a monumental difference. For married couples and civil partners, the opportunities are significant. If you are in either of those categories, there are two simple steps to be aware of.
The first is that your entire estate can pass to your surviving partner without any inheritance tax liability. This is known as the spousal exemption and often acts as the ‘wake-up call’ for the surviving spouse of those who did little or no planning before they died. The surviving spouse now faces greater challenges after inheriting the deceased’s assets tax-free and has fewer allowances to help offset the tax burden.
Secondly, you can also pass on your individual tax-free allowance, called the “nil-rate band,” which currently stands at £325,000, to your spouse.
This means a surviving spouse can inherit their partner’s unused allowance, effectively doubling their own. This creates a combined tax-free threshold of £650,000 to pass on to the next generation.
The Residence Nil-Rate Band
In addition to the standard allowance, an additional relief applies to your family home. The “residence nil-rate band” (RNRB) allows you to pass on an extra £175,000 tax-free, provided you were living in the property and it is left to direct descendants such as children or grandchildren.
When you combine these allowances for a couple, the numbers become powerful:
- Combined Nil-Rate Band: £650,000 (£325,000 x 2)
- Combined Residence Nil-Rate Band: £350,000 (£175,000 x 2)
- Total Tax-Free Allowance: £1,000,000
With careful planning and the right legal structures in place, a couple can pass on a £1 million estate to their children with a zero-tax bill. But with soaring property prices, many estates now exceed this figure, making proactive planning more critical than ever.
Smart Gifting: Reducing Your Estate in Your Lifetime
One of the most effective ways to manage your IHT liability is to reduce the value of your estate by gifting assets during your lifetime.
The Annual Exemption
Every individual can gift up to £3,000 each tax year without it being added to the value of their estate. This is your “annual exemption.” If you don’t use it in one year, you can carry it forward for one tax year, allowing for a potential gift of £6,000. For a couple, this could mean gifting £12,000 in a single year.
Normal Expenditure Out of Income
A lesser-known but highly valuable exemption allows you to make regular gifts from your surplus income. As long as these gifts do not affect your usual standard of living, they are immediately exempt from IHT. This is ideal for helping children with rent or grandchildren with school fees.
Investment Property & IHT
If you own investment properties, inheritance tax can be especially challenging, as these assets do not benefit from the same residence allowances as your main home. However, there are practical strategies to consider.
Placing investment properties into a trust can, over time, remove their value from your estate for IHT purposes—although specialist advice is essential to avoid pitfalls such as immediate tax charges or capital gains tax on transfers.
In some cases, restructuring how your property is owned, such as through joint ownership or gifting shares in the property to family members, can further reduce your estate’s taxable value. For those who let commercial or furnished holiday properties, certain types of ‘business relief’ may apply, offering significant IHT savings.
Working with an experienced adviser ensures your approach complies with current regulations and maximises the available tax relief.
The Most Powerful Tool: Your Will
All of the above strategies are undermined if you do not have a professionally drafted Will. Dying without a Will—known as dying intestate—means the government’s rigid “Rules of Intestacy” decide who inherits your assets. These rules often fail to reflect modern family structures.
Taking Control of Your Legacy
While the headlines may be alarming, you are not powerless. Estate planning is about taking control and ensuring your life’s work benefits those you love, not the tax office. Seeking professional advice is the first step. A qualified expert can assess your unique circumstances and recommend advanced solutions, such as trusts or business property relief, that align with your goals.
Acting now ensures you have all the tax-saving opportunities available to you, whereas putting things off or leaving them for others to deal with after your demise can be a costly mistake. It costs you nothing to find out whether you are currently structured tax-efficiently. If you are, you will gain peace of mind and secure a stable financial future for your family. If you’re not, there is time to do something about it. Either way, contact advisors at Soteria Trusts for a complimentary tax position review today!
