If your estate is sufficiently large, inheritance tax may be payable after you pass away.
But there are often ways you can cut your estate’s tax bill and increase the amount passed on to your heirs. Here are a few examples...
1 Make gifts
One of the simplest things you can do to avoid paying inheritance tax (IHT) is to spend or give your money away during your lifetime.
Each tax year, you’re allowed to give up to £3,000 away as a gift, split between however many people you like. You’re also allowed to make unlimited gifts of up to £250 to others, too.
If you’re off to a wedding, you can give up to £1,000 and never have to worry about inheritance tax. You can give £2,500 to grandchildren, and £5,000 to your children too. Wedding gifts must be made before the wedding, and the wedding must go ahead, otherwise they’ll be classed as potentially exempt transfers.
If you make gifts above the thresholds, they may be taxable if you don’t survive for seven years after making them. Otherwise, they’ll be tax-free too.
2 Leave money to a charity
Any money you leave to a charity, providing it is registered in the UK, will always be free from inheritance tax. The same goes to gifts to political parties, or to local sports clubs.
What’s more, if you leave more than 10% of your taxable estate to one of these groups in your will, the inheritance tax rate for the rest of your estate will fall from 40% to 36%.
The 10% only applies to the amount of your estate over the lifetime allowance. So, for example, if you were leaving behind £425,000, you would benefit from the lower rate if you gave away more than £10,000 (10% of the amount over £325,000).
3 Leave your estate to your spouse
Your spouse or civil partner will never have to pay tax on assets you leave them, regardless of the amount.
When your spouse passes away, they’ll inherit your unused personal allowance, allowing them to pass on up to £325,000 more as part of the main IHT allowance.
If they (or you) have remarried, then unused personal allowances can be added together and passed on – but only up to the value of one whole personal allowance (ie the most it can increase by is £325,000).
4 Use property allowances
If you’re leaving your estate to children or grandchildren, the new property allowances let you leave more of your home before tax is due.
In the current 2021/22 tax year, it’s worth £175,000 per person. For a married couple, this increases the tax-free amount by £350,000, so including the personal allowance, estates of up to £1,000,000 could be completely free of IHT this year.
5 Take out a life insurance policy
If you can’t beat an IHT bill, you may be able to insure against it. This is one of the simplest ways of covering an unwelcome bill, but unless you’re relatively young and healthy, the cost may be high.
Providing the policy is written into trust, the pay-out won’t form part of your estate.
HMRC treats the premiums paid into the insurance policy as a lifetime gift if you pay them yourself, but these can usually be covered by one of the tax-free exemptions – the annual £3,000 exemption or the ‘gifts out of normal income’ exemption.
6 Consider a ‘deed of variation’
A deed of variation allows your heirs to alter your will after death so that, for example, part of the inheritance is re-directed to someone else.
They can draw up a deed of variation within two years of your death, but all affected beneficiaries under the will must agree to the variation.
This can be difficult in practice, especially if there are many beneficiaries.
As a rule, it is better to review your will periodically so that your affairs are tax efficient.
IHT is a complex subject and those seeking to plan their affairs to optimise the tax position should always seek professional tax advice. Contact us to discuss any of the matters in this article.