How to Reduce Inheritance Tax with Five Simple Steps

Avoid and tax shouldn’t really be used in the same sentence, but if you plan carefully for your future and that of your loved ones then you can reduce Inheritance Tax (IHT) bills that arrive after death.

Inheritance Tax is a capital tax that is payable on the residual value of an estate (money, possessions, property) of a person who has died by the inheritor/s of the estate. There is an Inheritance Tax allowance of £325,000 per person – but if the estate is valued in excess of this threshold, the part of your estate that is above it will be subject to a 40% tax rate. HM Revenue & Custom (HMRC) Inheritance Tax receipts for 2019 totalled £5.2 billion.

Fortunately, there are ways to reduce the Inheritance Tax you pay, or perhaps avoid paying it altogether.

Leave your estate to your civil partner or spouse

Your civil partner or spouse is exempt from paying tax on assets you leave them. Your partner will also inherit your unused £325,000 Inheritance Tax allowance, meaning that when your partner passes away, their IHT allowance will increase to £650,000.

Leave your home to your children or grandchildren

Your Inheritance Tax allowance will increase to £500,000 if you leave your home to your children or grandchildren. 

Use it or lose it

The simplest way to reduce the Inheritance Tax due after your death is simple, spend or give away your money when you’re still alive.  

You are permitted to

Gift an unlimited amount, providing you live for seven years afterwards, this is known as a Potential Exempt Transfer, and the amount of tax payable tapers as the years pass by.

Gift up to £3,000 per tax year to a person or persons of your choosing.  If any of this “annual exemption” is unused, it can be carried forward into the following year.

Gift up to £1,000 per year to a person for a civil ceremony or wedding (£5,000 for a child, £2,500 for a grandchild or great-grandchild).

Make unlimited payments to help with the living costs of a child under 18 or an elderly relative.

Give unlimited presents (“normal gifts”) for special occasions, such as birthdays and Christmas, provided it isn’t detrimental to your standard of living.

Give unlimited gifts up to the value of £250, providing you haven’t used another exemption to gift money to the recipient. 

Give unlimited gifts or leave your money to charities, political parties or local sports clubs.

Give your home away before you die, and providing you live for seven years afterwards, there will be no Inheritance Tax to pay. However, if you decide to still live in the property after transferring it you will have to pay the new owner (even if it’s your children) a full

Invest in your pension

Your pension isn’t usually part of your estate, so paying into a pension scheme can be a tax-efficient way to reduce Inheritance Tax. If you are going to go down this route, check with your provider to ensure your pension is not considered part of your estate. If it is, you might consider transferring it to a pension scheme that offers the protection you require. You must also make sure you inform your pension provider who you want to be the beneficiary of your pension when you pass away. 

Set up a trust

If you put money into a trust, you are delegating a trustee to look after it for a beneficiary (e.g. your children). It is no longer part of your estate, so there will be no Inheritance Tax to pay, although depending on the type of trust there may be an entrance charge to put it into trust, or a 10-yearly charge to keep it in trust.

At Killik & Co we can help advise how to plan efficiently for the future and reduce the Inheritance Tax that is paid once you are gone.

This short guide should be enough to get you started on the road to successfully planning how to approach later life and avoiding some of the common pitfalls. Please fill out your details below to download a free PDF version or contact us at [email protected] 

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