Why enjoying your wealth in retirement can be highly tax-efficient

Inheritance Tax (IHT) can put a significant dent in the money that your family will receive from you on your death, typically charged at 40%. Understandably, that’s why many people seek methods that can limit the tax bill their loved ones could end up having to foot.

From making use of trusts to including charitable donations in your will, there are many common strategies that can help you reduce the IHT bill that your family may be liable for when you pass away.

Interestingly, another method you could consider is enjoying your wealth as much as possible in retirement.

Whether that’s through spending more of your money than you currently intend to, or gifting it to your loved ones while you’re still alive, you may actually be able to reduce the size of the IHT bill your beneficiaries could be facing down the line.

So, find out why enjoying your wealth can be highly tax-efficient, and how financial planning can help you achieve a healthy balance in doing so.

You have a tax-free threshold before IHT is charged

First and foremost, it’s important to understand the “nil-rate band”, a tax-free threshold before IHT is charged. In the 2023/24 tax year, this stands at £325,000.

You may also be able to make use of the “residence nil-rate band”, allowing you to pass on up to an additional £175,000 if you pass your main residence to your direct descendants. This includes your children, grandchildren, or other lineal descendants.

That means you can potentially pass on up to £500,000 to your beneficiaries before they’ll face an IHT charge. As every individual has access to these tax-free thresholds, your spouse or civil partner will also have them. So, you can theoretically pass on up to £1 million tax-free as a couple.

However, any value exceeding your nil-rate bands could be subject to a 40% tax charge.

Enjoying your wealth could take the value of your estate below your nil-rate band

Crucially, the less of your estate that exceeds the nil-rate bands, the less tax your beneficiaries may have to pay on the rest of your wealth when you pass away. That’s why it can be tax-efficient to enjoy your wealth as far as possible, reducing the size of a potential bill.

You may have a rough idea of what your income will likely be in retirement. You might also have a rough idea of how you want to spend your time. Yet, with IHT in mind, it could be financially worthwhile to increase your expenditure and even upgrade your vision for what you want to achieve.

In doing so, you could ultimately spend more of your wealth, reducing the size of your taxable estate, and potentially even taking it under the nil-rate band.

This doesn’t just have to be spending your money, either. As alluded to earlier, gifting money or assets can also reduce the size of your taxable estate in certain circumstances.

For example, you can:

  • Use your annual gifting exemption, allowing you to pass on wealth to whoever you’d like with it falling outside the value of your estate. In 2023/24, your exemption is up to £3,000 (£6,000 as a couple).
  • Gift money to people you know who are getting married. You can gift up to £5,000 to children, £2,500 to grandchildren, and £1,000 to anyone else.
  • Make unlimited gifts of up to £250 to as many individuals as you like, provided that they don’t receive gifts from you under another exemption.
  • Gift directly from your income. These gifts must come from regular income, and you must be able to maintain your standard of living.
  • Make gifts of any size and, provided that you outlive the gift by at least seven years, the value will fall outside your estate. This is known as a “potentially exempt transfer” (PET). PETs can be highly complex, so it can be sensible to seek advice first.

This can be an enjoyable way to use your wealth, allowing you to see the positive impact your money can have on your loved ones’ lives.

Whether you seek to reduce the size of your estate by spending or gifting, enjoying your wealth could allow you to live your desired lifestyle or support your loved ones during your lifetime, while simultaneously reducing the IHT bill they may face down the line.

It’s important to plan before you start spending

While enjoying your wealth can be an effective way to mitigate IHT, it’s important to comprehensively plan first. After all, you wouldn’t want to spend too much early on in your retirement and suddenly find yourself unable to afford your lifestyle later.

This is where financial planning can be valuable. By creating a plan that’s based around your goals for the future, you can carefully calculate:

  • What your desired lifestyle could cost
  • How much income you can afford to draw from your savings, pensions, and investments
  • What could happen to your wealth in various scenarios, such as in the event of a market downturn
  • How much you can afford to spend or gift while still maintaining your standard of living.

Armed with this information, you can have the confidence to enjoy your wealth, knowing that it’s suitably organised to support you in later life.

Get in touch

Want to reduce an IHT liability on your estate without compromising on your future? We can help.

Email info@britannicplace.co.uk or call 01905 419890 for more information.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.

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