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How to Avoid Inheritance Tax

Over the last few years, more people have become interested in ways to reduce or completely avoid the inheritance tax their loved ones are required to pay in the event of their death. Inheritance refers to an individual’s personal finance accumulated over the course of their lives, while inheritance tax, or IHT, refers to the tax applicable on these assets upon their death.


Inheritance tax can prove to be a complicated matter and, worse still, could have a big impact on the financial futures of your loved ones. That said, many individuals are looking for ways to avoid it altogether. Here we offer some suggestions on inheritance tax and how you could avoid it.


How much is Inheritance Tax?


The Inheritance Tax rate is 40% of the value of your entire estate if it is valued over £325 000 for individuals and £650 000 for couples. Working this out is simple and requires you to list the value of everything you own and how much money you owe. This is referred to as your estate and is the amount that your inheritance tax bill is based on.


Seven Ways to Avoid Inheritance Tax


There are various ways you can reduce or even completely avoid inheritance tax. Let’s look at some options available to help you and your loved ones can get the most out of your estate:


1. Make a will


Drawing up a will is one of the most important things you can do for your family. In the event of your death it plays a major part in estate and inheritance tax planning, as it helps to ensure that your assets are distributed to your loved ones as per your wishes, including foster children, step children, grandchildren and children. Without a valid will, your assets will be distributed according to the rules of intestacy, which are the rules that are put in place if a person dies without leaving a will. What’s more, no will would mean that your assets may be liable to inheritance tax.


2. Keep your assets below the nil rate band


The nil rate band is the amount of your estate that is not liable for tax. As of the 2015/16 tax year, this is £325 000 for individuals and £650 000 for couples. This amount has been frozen since 2009/10, but is expected to start increasing with inflation from 2020/21. In addition, since April 2017, individuals are now entitled to an additional £100 000 tax-free ‘family home allowance’, which can be used against the value of the property being left to your children or grandchildren.


3. Give assets away to your family/friends


Giving away assets to family or friends who are not your spouse and civil partner could exclude them from inheritance tax, although the value of the gift will still be included in your estate for inheritance tax for up to seven years. This means that, should you gift a large sum of money to your children and pass away after seven years, it won’t be liable for inheritance tax. Another option would be to give away smaller amounts every year (up to £3,000 a year), although there might be Capital Gains Tax payable on certain assets that you give away. It is advisable to check with a lawyer to be 100% sure.


4. Set up a trust for your assets


Putting money, property or investments into a trust means that they no longer form part of your estate and thus, are not subject to inheritance tax. But this also means that neither you, your spouse or your children under the age of 18 can make use of these assets. What you can do is set up the trust for your adult children, for your grandchildren’s education or to support a family member with a disability. That being said, there may still be Capital Gains Tax consequences on your trust.


5. Gift it to your partner


If you are married or in a civil union, you can give all your assets to your partner. The exception to this rule is if your partner was born outside of the UK, which may limit the amount you can give. Your estate will therefore not face Inheritance Tax charges on the value of the gift.


6. Leave some of your assets to charity


Anything left to charity is free of Inheritance Tax, so contributing to a charity will be a good way to reduce your Inheritance Tax bill. What’s more, leaving at least 10% of your estate to charity means your Inheritance Tax is lowered from 40% to 36%. While this difference may not seem significant, it will mean your beneficiaries will receive more than they would otherwise, plus you will be supporting your favourite charities.


7. Take out life insurance


Taking out a life insurance policy is always a good idea. While it won’t reduce the amount of Inheritance Tax due on your estate, the pay-out might be easier for your surviving family to pay the bill or prevent the family home from being sold. If you choose this option, just make sure the insurance payout goes into the trust as it could increase your estate, which means you will have to pay more Inheritance Tax.



What about your pension?


In most instances, an individual’s pension fund is exempt from Inheritance Tax. That being said, if you pass away after the age of 75, your beneficiaries will pay income tax on your pension fund, which can range from 0% up to 45% depending on your own income tax rate. It is therefore a good idea to use other savings and investments to provide your income in retirement instead of your pension as it can reduce the taxable assets while non-taxable assets like your pension will retain its value.


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