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How to avoid Inheritance Tax

Mary had lived in Bristol for most of her life, with a well-paying job and a house worth £1.3 million. She was aware of Inheritance Tax, but she had never thought about taking steps to plan what happens to her estate after she dies. However, she faced a high IHT bill, largely due to the size of her estate, which was comprised mainly of property.

She had considered giving her home away to her children when she died, but she was worried about the possibility of them paying the market value rent for the property. As a result, she hadn’t taken steps to protect her estate in the event of her death. 

Current rules that cause problems

 

As it stands, there is a 40% tax hit on your estate if it is valued over £325,000. There are currently no tax to pay if: 

  • The value of your estate is below the Nill Rate Band (NRB) of £325,000, or
  • You leave everything above the threshold to your spouse or civil partner, or
  • If you leave your home to your children or grandchildren, your allowance increases to £500,000

Possible way to fix problems


If you, like Mary, are at risk of facing a large IHT bill upon your death, there are things you can do to avoid paying such high levels of IHT.
 

How to avoid Inheritance tax The Exemptions

 

You can pass a home to your husband/wife/civil partner when you die, and there is no IHT to pay if you do this. However, if you were to leave the home to another person in your will (e.g. a sibling), this will count towards the value of your estate. Furthermore, if you own your home, or have a share in it, your tax-free threshold can increase to £500,000 if:

  • You leave it to your children or grandchildren
  • Your estate is worth £2 million or less

Gifting

 

Another way to avoid paying IHT is by making regular gifts during your lifetime. You can give away £3000 worth of gifts each tax year without them being added to the value of your estate – this is known as ‘Annual Exemption’. You can carry any unused annual exemption forward to next year, however this can only be used for one year. 

There is also no IHT to pay if you pass a home on to your husband/wife/civil partner when you die. However, if you were to leave your home or share in it to another person in your will, this would count towards the overall value of your estate, meaning that IHT would be payable. 

If you were to move out of your current home and live for another 7 years, there would not be any IHT to pay on that property. However, if you wanted to continue living in said property, you would have to pay the market rent and your share of the bills, otherwise you will be treated as the beneficial owner and the property will remain part of your estate. 

Option to seek advice and help through T&B.

 

If you have concerns regarding the effects of Inheritance Tax on your estate, Thornton and Baines offer free consultations to help guide you through your personal situation.

 

We also offer free consultations over Zoom, where you can speak to one of our advisers who will provide guidance on how you can avoid paying IHT on your estate.

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