5 tips for reducing inheritance tax

Discover five practical and actionable tips to reduce inheritance tax and safeguard your assets. This article on estate planning will guide you on maximising what you leave for your beneficiaries, ensuring the long-term protection of your hard-earned wealth from the taxman.

The Conservative party is now firmly on an election footing, and inheritance tax is the focus of much discussion. There is even talk of abolishing it altogether. But for now, even though only 5% of estates are IHT liable, the UK’s “most hated tax” still generates some £7 billion per year for the Treasury.

Director of Private Clients Nick Rolf discusses what you can do during the estate planning process to keep as much of your money away from the taxman as possible.

What is inheritance tax?

Essentially, it is the money that HMRC gets from your estate when you die. And your estate is all the assets you own – your money, your property, your businesses and your investments, as well as any objects of value you might have (jewellery, art, cars and the like).

Currently, the threshold below which inheritance tax does not need to be paid is £325,000. This is currently set to remain frozen for the next five years.

Ways to reduce inheritance tax

With inflation still some three times higher than the Bank of England's 2% target rate, many of us are feeling overstretched. If you want to ensure that what you leave to your beneficiaries is as bountiful as possible, then you need to start planning now. The sooner you start, the easier it will be for your family when you are gone.

Of course, you could simply move to a country where IHT is not payable. If your permanent home is abroad, inheritance tax is only payable on your UK assets. But there are other – less drastic options – for keeping the taxman away from what you have accumulated over your lifetime.

1. Make a will

This is actually pretty fundamental. If you don’t state how you want your assets to be divided, the law decides for you. And the chances are that the taxman will get more than you would want him to get. Fortunately, it is relatively straightforward to put together a will (although we would advise that you seek some help from a solicitor or at least a will writer). Provided you sign it in front of two witnesses (who are not named beneficiaries), it is legally binding. Needless to say, you must be of sound mind in order to make a will. For more complex estates, it is probably a better idea to use a solicitor.

Did you know that if you leave at least 10% of your estate to charity, your family pays less inheritance tax?

2. Invest your money in assets that qualify for business relief

Such assets can include shares in unquoted trading companies, as well as interests in trading partnerships and sole trader businesses. There is also Agricultural Property Relief which can apply to farmland and buildings. Admittedly, these tend to be higher-risk investments and are not appropriate for everyone. But they might be appropriate as a small percentage of your overall wealth – 10% or so. You remain in control of a BR-qualifying investment, and the shares become 100% inheritance tax-exempt after a holding period of just two years, as long as the shares are still held at the time of death.

3. Spend or gift your money

The easiest way to reduce inheritance tax – or even avoid it altogether – is to bring your taxable estate down to beneath the threshold. An excellent way to do that is to simply go out and spend your hard-earned money!

Another way is to give cash or assets to family or friends, although there are rules governing how you can do this.

You can give away up to £3000 each year without it being added to the value of your estate. That £3000 can go to one person… or you can choose to split it among several people.

And that amount can be rolled over for a maximum of one year. So if you do not use your allowance one year, you can give away £6000 the following year.

You can also give away £5000 towards your child's wedding, or £2500 towards a grandchild's wedding. And if you are a high earner, you can “gift from excess income”: but the excess income in question has to be what is left over after all of the gift-giver’s own regular expenditure has been met.

If you give away more than that, then the seven-year tax rule (a sliding scale) will apply. If you exceed the inheritance tax-free threshold, gifts will only be completely free from IHT if you live for seven years afterwards.

Good advice would be to start giving away money sooner rather than later (if you want to avoid the taxman getting his hands on your estate).

You can also make regular gifts from surplus income that will not be subject to the seven-year rule.

4. Put money into your pension

Pensions do not form part of your taxable estate, so money in your pension pot can go straight to your family without being subject to inheritance tax. So it is a good idea to keep your pensions intact and focus instead on spending or gifting money from ISAs or other savings.

5. Set up a trust

You could put some of your assets “in trust”. This way, your appointed trustees will manage your assets after your death, on behalf of your beneficiaries. You may choose to put money “in trust” for your children to be managed until they are responsible enough to look after it themselves.

Trusts can help minimise inheritance tax and protect assets for vulnerable relatives – people with disabilities, for example.

Putting a life insurance policy in trust will protect it from inheritance tax. If the insurance company pays out, the money will not form part of your estate and will go directly to your beneficiaries – uneroded by IHT.

Trusts can be extremely useful, but they are complicated and involve some upfront costs. We can recommend an experienced estate planning professional who can give you the advice you need.

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