How Can I Reduce Or Avoid Inheritance Tax On My Estate?

Inheritance Tax (IHT) is without doubt one of the most hated taxes in the country.

After all, why should you pay tax on your assets when you die having already paid tax on them while you were alive?

That said, IHT is here to stay, although potential changes to the rules are being considered.

One of the most frequent questions we get asked at Family Estate Planning is ‘How can I reduce the Inheritance Tax bill on my estate?’.

Often people come to us wanting to know how to avoid Inheritance Tax altogether!

The simple answer is that there are number of completely legitimate ways you can drastically reduce the amount you pay. And in some cases it is possible to eliminate it altogether.

But how much you save depends on how early to start to think about IHT and how well you plan for it.

It can be a complex area and often the real benefits come from a deep dive into your estate.

But for now, here are six ways you can cut your IHT bill:


Annual Exemptions

It may seem obvious, but make sure you use your annual allowances.

These are sums of money or other assets that you can give away which are immediately exempt from IHT.

These include gifts of up to £3,000 each year (anything of value such as cash or possessions) known as your annual exemption.

On top of this, you can give an unlimited number of small gifts of up to £250 per person. You can also give additional gifts for special occasions, assuming the individual hasn’t benefitted from a small gifts in the same tax year.

For example, you can give up to £5,000 per children, £2,500 per grandchild or great-grandchild or £1,000 per person for their wedding or civil ceremony.

And if you’re passionate about charity or politics then gifts to these organisations are tax exempt as well.


Regular Gifts Out Of Income

You’re allowed to make regular gifts out of your income as long as you can maintain your standard of living while doing so.

For example, if you only use 75% of your income you’re allowed to give away the other 25% to anyone you choose and it’s immediately exempt.

The money must be surplus cash and you’ll need to keep a record of the gifts, but providing you do this it’s a completely legitimate way of cutting your IHT liability.


Potentially Exempt Transfers (PETs)

You’re allowed to gift as much cash as you wish to anyone and they’ll be exempt from IHT if you live for seven years after the event.

This is known as a Potentially Exempt Transfer or PET which are currently subject to what’s known as the Seven Year Rule.

If you die within seven years of making the gift the amount of IHT the beneficiary will have to pay depends on when you died, known as ‘Taper Relief’.

You’ll pay the full amount of tax if you die within three years of the gift. This then falls to 32% in years 3 to 4, 24 % in years 4 to 5, 16% in years 5 to 6 and 8% in years 6 to 7.

The Office of Tax Simplification is currently considering far-reaching changes to the rules surround IHT, including reducing the Seven Year Rule to five years.


Charitable Giving

Gifts to charity, whenever they are made, are free from tax.

This can be gifts that you make while you’re alive, or bequests made in your will. Either way, they can be made without any IHT liability.

You can also use charitable giving to reduce the overall IHT liability of your estate.

If you leave a minimum of 10% of the value of your net estate (what remains have deducting all your exemptions and reliefs) to charity, the IHT on the rest of your estate reduces from the standard 40% to 36%.

There are also plans to remove VAT from the cost of writing a Will if the Will includes a charitable legacy.


Using Trusts

Trusts are a very useful way of preserving assets, but they can also be used to reduce any IHT liability your asset may have.

For example, many people have some form of life insurance, but most of these are not set up in a trust.

When the person holding the policy dies then the value of this policy is added to their estate for IHT purposes.

Equally, if the policy is left to a spouse or partner then this will then contribute to their liability.

Using a trust to receive the proceeds of the policy will mean that the money is outside of the estate for IHT purposes.

Trusts can also be used to receive other assets, such as pension lump sums and death in service benefits.


Business Relief

This is an often overlooked area of IHT mitigation which can be used by anyone to reduce their bill.

The obvious part of Business Relief (BR) – previously known as Business Property Relief – is that it enables business owners to transfer relevant business assets and qualify for relief of either 50% or 100% depending on what’s being transferred.

But it can also be used by anyone who holds or buys investments in qualifying businesses.

For example, shares in companies listed on the Alternative Investment Market (AIM) qualify, as long as they meet the necessary criteria.

Likewise, you can buy into certain funds which have been created to enable people to benefit from BR.

Many people choose BR-qualifying investments as part of their estate planning strategy because you only have to hold the investment for two years before it’s 100% IHT exempt.


Inheritance Tax is often referred to as the ‘avoidable tax’ because with careful planning so much can be down to cut or even eliminate your bill.

The sooner you start thinking about IHT planning the better and we can help guide you through the often complex rules that surround this unpopular tax.


Get in touch

Family Estate Planning can help with Inheritance Tax planning in Wokingham, Berkshire, Reading, Surrey, Hampshire and across the South East.

For an informal, no obligation chat about your circumstances please email or call 0118 974 0134.