Seven Steps to Avoiding Inheritance Tax

It goes without saying that when it comes to tax, we all roll our eyes to the back of our heads in disbelief that yet again the government finds another way to tax our money. Inheritance tax (‘IHT’) is the tax that we find the most frustrating and difficult to fully understand.

It is a tax at a rate of 40% that is applied to everything in a person’s estate over the first £325,000 after they die, which leaves no surprise that HMRC pocketed £5.32bn in inheritance tax between 2019-2020.

What this means is that we leave behind less money for our loved ones. There are, however, ways that you can avoid paying inheritance tax altogether. Read on to find out more on how you can save money by avoiding inheritance tax.

Step 1 – Write a Will!

Without a Will, your assets will be distributed according to the intestacy rules, potentially leaving your assets liable to IHT. Writing a Will not only ensures that your wishes are respected after you pass but can reduce the amount liable to IHT. It’s important to note, that there is no IHT paid on assets where they have been received from spouses.

If you are concerned as to who receives your assets, it is highly recommended that you make a Will before you die. Our highly skilled Probate Solicitors can help with this. For more info visit Will Drafting.

Step 2 – Place your assets into a trust.

Putting your assets into a trust can avoid inheritance tax because it does not form part of your estate. There are various trusts that you can benefit from, that get released when your children or grandchildren reach a certain age. Other trusts such as an ‘interest in possession trust’, enables you to receive an income from your assets (is, however, liable to income tax) whilst avoiding IHT when you die.

Step 3 – Give it away!

As silly as this may sound, giving away your assets is actually a popular and savvy way of avoiding IHT. If you give assets away and you survive for at least 7 years after the gift, then these gifts are free of liability. If you do die within 7 years, there will be a reduced rate of IHT.

Additionally, you can gift £3000 a year completely free of IHT, and where no gift was made in the previous year, this allowance goes up to £6,000 for the same period. You may also gift an additional £5,000 on the occasion of your children’s marriage and £250 to each individual for Christmas and birthdays.

Step 4 – Gifts from surplus income.

Where your income exceeds your normal expenditure, you may gift the excess income free of IHT. However, the amount must not be increased as a result of a reduction in your standard of living. This is called a regular or habitual gift.

Step 5 – Keep below the IHT threshold.

The thresholds for inheritance tax can sometimes fluctuate, depending on the decisions made by the Chancellor. In this tax year, the tax-nil rate on IHT for individuals is £325,000, and £650,000 where the estates are transferred to a spouse. The ‘Main Residence Transferable Allowance’ enables each beneficiary to receive £175,000 free of IHT on property.

Step 6 – Consider a life insurance policy.

Taking out life insurance can potentially cover liability for IHT. You can also place the policy in a trust so that it is paid outside of your estate.

Step 7 – Donate to charity.

If you have a charitable heart, then donating some of your estates to charity is an option for reducing liability on IHT. When you leave at least 10% of your assets to a charity, you can reduce the IHT rate on the rest from 40% to 36%.

If you need help understanding Inheritance Tax and Probate law, our experienced team of Probate Lawyers are on hand to guide you through it. For additional information, visit our page on Inheritance Tax or give us a call on 023 8023 4433 to get started.

Disclaimer: Information on this webpage is not intended for legal purposes or advice. If you require legal advice or services you should seek a professional legal practitioner.