fbpx

How to Pay Less Inheritance Tax

Date Added 17.06.24

No one likes to think about what will happen after they’re gone, but after working hard all your life, it’s important to plan for the future of your estate. By organising your affairs for both during your lifetime and after your death, you can ensure that your assets are passed down to your family and loved ones in the most efficient way possible.

One aspect of estate planning is inheritance tax (IHT) which is the focus of this article. No matter the size of your estate it is important to obtain expert inheritance Tax Planning advice, to secure your family’s financial future and ensure your hard-earned money, property and assets are distributed in accordance with your wishes as well as ensuring that, if Inheritance Tax is due, the least amount is paid.

Starting to plan early means that you will have a much more effective plan in place and will allow you to minimise the impact of potentially having to pay IHT. Planning early also allows you to put your estate planning strategy into place to ensure you have enough money to live the lifestyle you want, as well as deal with any unexpected situations that may arise along the road.

You can read about the other components of estate planning and why planning itself is so important in our article – Estate Planning – Why is it so important?

What is Inheritance Tax?

Inheritance tax (IHT) is a tax payable to HMRC in relation to your Estate on your death. It is normally paid by the executors of your estate and is paid to HMRC prior to the estate being distributed to any of your heirs.

You are only liable to pay inheritance tax if your estate’s value is above the current IHT threshold of £325,000. You do not pay IHT on the first £325,000 you leave to others.

This is also known as the nil rate band and the amount above it (the majority of the time) will be liable for inheritance tax at the standard rate of 40% on your death.

However, if you leave 10% or more of your estate’s value to charity, it does lower the inheritance tax rate for the remaining portion over the threshold to 36% from the standard 40%.

Your estate is also entitled to the Residence Nil Rate Band if you leave your property to your descendants (i.e. children and/or grandchildren).

More information on how IHT works can be found here: https://www.gov.uk/inheritance-tax.

First Steps

Before you start thinking about how much inheritance tax you may be required to pay, you really need to establish the value of your estate. This will enable you to determine if there is an inheritance tax liability and if tax planning is required.

In order to establish the size of your estate you need to include any properties you own, business assets, bank accounts, shares and investments and life insurance policies, as well as personal belongings of value such as jewellery and vehicles.

You can find out more about valuing an estate in our article – Do I need to value an estate when someone dies?

Other things to include are the value of any cash gifts you may have made in the last 7 years, as these may be taken off your personal inheritance tax free allowance if you do not live for 7 years after giving this money away. In simple terms any gifts given more than 7 years before your death will not be liable (unless you continue to benefit from them), any gifts given in the 7 years prior to your passing will count towards you allowance.

Do I Have to Pay Tax on My Inheritance?

There are certain circumstances when you would be exempt from paying Inheritance tax, even when your assets are valued at over the threshold. These are:

  • If you leave your estate to your spouse/civil partner;
  • On the first £325,000 you leave to others;
  • On any tax-free gifts, such as your annual exemption (£3,000), Small gift allowance of up to £250 to individuals, wedding gifts (up to a limit, depending on who the gift is for), money freely given from your income (as long as it does not affect your lifestyle) and funding a loved one’s living costs;
  • Any gifts left to charity.

It’s important to understand that only the inheritance designated for your spouse/civil partner, annual tax-free gifts or for charity is exempt from inheritance tax; it doesn’t render the entirety of your estate tax-free.

How Do I Pay Less Inheritance Tax?

If you are someone who will be charged Inheritance Tax on your estate, inheritance tax planning in your lifetime could very well reduce your tax liability and enable you to pass more of your assets on to your family and loved ones.

By planning in advance and by utilising the available exceptions and allowances, it is possible to reduce or even eliminate the need to pay IHT, some things to consider are:

Having a Will

The most important document you should have in place is a valid Will and you should ensure that you review it regularly, so it can be updated as and when needed. Not only is your Will important as it allows you to ensure that you leave your assets to your chosen beneficiaries, it also allows you to avoid potential inheritance tax liabilities under intestacy rules.  Intestacy rules are used to distribute an estate when someone has died leaving no valid Will.

If you need aid in putting together a will, our expert trusts and estate solicitors have years of experience in drafting comprehensive wills for our clients.

Giving to charity

As previously mentioned, it may be worth considering giving 10% of your net estate to charity in order to reduce the IHT rate from 40% to 36%.

For further analysis on how this can benefit you or a love one, read our article which delves further into the topic – Inheritance Tax Incentive for Charitable Legacies

Leaving your main residence

Gifting to a spouse or civil partner is completely exempt from IHT.  It is also possible to further reduce the amount that is taxable if you leave your home to your ‘direct descendants’.  This includes children (be they biological, step, adopted or fostered) or grandchildren, but does not include nieces,  nephews or cousins.

By doing this you not only benefit from the £325,000 basic IHT allowance that everyone is allowed, you can also take advantage of the ‘Residence Nil Rate Band’ or ‘Main Residence Band’, which is an additional allowance of £175,000 and which means IHT may not be due on the first £500,000 of your estate (£325,000 + £175,000), depending on who you leave the property to.

However, there are some points to be aware of that will affect this:

  • The £175,000 allowance only applies if your estate is worth less than £2 million. If your estate is worth £2 million or more, the allowance decreases by £1 for every £2 above £2 million;
  • If your home is in a ‘discretionary will trust’ it will not qualify for the £175,000 allowance, even if the beneficiaries of the trust are your children or grandchildren;
  • If your home is not worth £175,000 (or £350,000 if yours and your spouse’s allowances are combined – you cannot combine allowances if you’re not married or in a civil partnership), you are unable to use the allowance to offset tax against other assets, this means in effect it is an allowance of ‘up to’ £175,000.
Reduce the size of your estate in your lifetime: Tax-Free Gifts

Reducing the size of your estate in your lifetime is a good way to reduce your IHT liability and there are multiple ways of doing this, through the use of Tax-Free Gifts.

A gift must be a genuine unconditional gift that you will not gain from in any way, so it must be given without the desire to receive something in return or the requirement that it will be repaid.

Annual Tax Exemption – Every Tax year, you can give away up to a total amount of £3,000, as this does not form part of your estate and so is therefore not subject to IHT.  If you decide not to use the full annual exemption amount,  anything you do not use can be carried forward by one tax year.

When you are giving gifts out of capital you need to be mindful that if you pass away less than 7 years after distributing the gift, it can become subject to tax. If you have used all of your annual exception allowance, the tax percentage differs depending on the length of time since your passing.

Amount of time between the gift and death Tax percentage applied
1 to 2 years Standard rate of 40%
3 to 4 years 32%
4 to 5 years 24%
5 to 6 years 16%
6 to 7 years 8%
7 years or more 0%

 

Small Gifts Allowance – This allowance allows you to give up to £250 per person each tax year.  These gifts do not count towards the Annual Tax exemption amount of £3,000, however, you cannot combine gifts on the same person, which means if you have already gifted someone your Annual Tax exemption, they cannot then also be gifted £250.

Wedding Gifts – if someone you know, either a family member or friend, is getting married or entering a civil partnership, then you can gift them cash tax-free.

Depending on the person you are giving the money to, the amount differs:

  • £5,000 to your child;
  • £2,500 to your grandchild or a great-grandchild;
  • £1,000 to any other person.

Wedding gifts can be combined with the £3,000 annual tax exemption amount (which means they can be used on the same person) but not with the £250 small gifts allowance.

More information on exactly what constitutes a gift can be found by visiting: https://www.gov.uk/inheritance-tax/gifts

Reduce the size of your estate in your lifetime: Payments from Income

Give money freely from your income – IHT is a tax on your assets.  Your regular income (such as your earnings or pension/s) are not classed as assets and so you can regularly give money away tax-free from this. This is only allowed if it is not deemed as detrimental to your lifestyle.

Fund a loved one’s living costs –  You are allowed to contribute to your child’s living costs and tuition fees at university. There are no caps on how much you can provide and the amount can be  Such combined with your £3,000 annual exemption (meaning it can be used on the same person) but again it is not allowed to be used with the £250 small gift allowance.  It can be given tax-free as long as the money comes from your own regular income and doesn’t affect your lifestyle

Life Insurance 

Depending on your situation, another common method for reducing the cost of IHT is to take out a life insurance policy, with the policy being held in Trust. This means that if you die the policy pays out straight away and can be distributed to your beneficiaries without being classed as part of your estate.  If this is a route you consider, it is important to be aware that the premiums for the policy need to be kept up in order for the policy to pay out and depending on your age and health, these can be quite high.

Professional advice and guidance

Getting the right professional advice is vital when looking at Inheritance Tax and Estate Planning.  You will need both advice from your solicitor, as well as your financial Advisor to ensure the best plan is put in place and the best vehicles are implemented to achieve your desired outcome.

Inheritance Tax Solicitors Near Me – Talk to Tollers

If you think you fall above the Nil rate band and would like to discuss Estate and Inheritance Tax planning… Talk to Tollers on 01602 258558, our experienced Trusts and Estate specialists are on hand to guide you through the process.

All things Tollers

We partner with...

Headway Accreditation 2024
SIA Business Member Badge
Santander Logo
Barclays Logo
HSBC Logo
Sports Aid Logo
Harlestone Park Logo
NGC logo
Northamptonshire County Cricket Club Logo
Legal Fees Insurance Logo