1. Give gifts while you’re still alive
One common way to lower the amount of Inheritance Tax you pay is by giving gifts while you’re still alive. Nevertheless, it is important that the gift is given in its entirety, otherwise, it may not be eligible. For example, if you decide to gift your home to your children but continue to live there, the gift wouldn’t qualify for inheritance tax exemptions, as you would still be benefitting from the gift.
If you’re considering making any large gifts, it is important to seek independent financial advice before you do so to ensure that you’re getting the benefits you expect.
Depending on the recipient of the gift, there are certain allowances you need to be aware of:
- Annual exemption: Everyone can give away up to £3,000 worth of gifts each tax year without them being included in that person’s estate. If you haven’t used the previous year’s exemption it will be carried on to the next, increasing your total annual exemption to £6,000.
- Wedding or civil ceremony gifts: As well as your annual exemption, you can also make a wedding or civil ceremony gifts of up to £1,000 per person. This amount increases to £2,500 for grandchildren or grandchildren, and £5,000 for gifts made to your own children.
- Small gifts exemption: You can also make unlimited gifts worth up to £250 per person, per tax year, permitting you haven’t used another exemption on the same person.
It is important to factor in all these exemptions when writing your will. If the value of your estate exceeds £325,000, it may be worth gifting money whilst you’re still alive, as this could be the most tax-efficient method for you. Before you make any large-scale financial decisions, please seek advice to ensure that you are making the best decision for your personal situation. One of our financial advisors will be happy to talk you through this over a free Zoom call. Contact us at:
2. Leave money to charity in your will
As with gifts to your spouse or civil partner, anything you choose to leave to charity is not liable for Inheritance Tax.
For example: if you leave an estate worth £375,000 and include a charitable gift of £60,000, no inheritance tax would be paid on this. This is because the total amount of your taxable estate would be £315,000 (375,000 – 60,000) and as a result below the £325,000 inheritance tax threshold.
Another way you can reduce your inheritance tax rate is by leaving over 10% of your net estate to charity. Your net estate is the amount remaining after subtracting your inheritance tax allowance. By doing this, you will lower your inheritance tax rate from 40% to 36%.
For example: if your estate is worth £725,000, your net estate will be £400,000 (625,000 – your 325,000 allowance). If you then decide to leave £30,000 to charity (10% of your net estate), your inheritance tax rate will lower to 36%. This means that your IHT bill will be £144,000 (36% of 400,000).
3. Write pensions and life insurance policies in trust
Pensions and life insurance policies can be good ways of reducing your inheritance tax bill. With either of these options, the policies might need to be written ‘in trust’. This generally means that any pay-outs will not count as part of your estate and will instead go straight to your beneficiaries.
4. Leave everything to your partner
If you’re married or in a civil partnership, you are exempt from paying inheritance tax on anything you decide to leave your spouse or civil partner, regardless of the size of your estate.
Married couples and civil partners can pass on their unused tax allowance to their partner, which can increase the surviving partner’s tax allowance.
For example: When writing her will, Kate decides to leave the entirety of her £550,000 estate to her husband Malcolm, meaning that there will be no inheritance tax due on her estate when she passes away.
As Kate won’t have used any of her £325,000 inheritance tax allowance, this will be passed on to Malcolm. As a result, Malcolm’s inheritance tax allowance will be £650,000.
When Malcolm passes away, he leaves his £800,000 estate between his nephews. This is £150,000 over his inheritance tax allowance, so the amount of inheritance tax due is £90,000.
5. Leave the house to your children
In April 2017, the government introduced an additional tax allowance on top of the nil rate band. This provides homeowners with an additional £175,000 tax allowance if they decide to leave their property to their children, stepchildren, or grandchildren, as well as their spouse or civil partner.
As with the nil-rate band, it’s important to understand the implications of this allowance before you write your will, as it may have an impact on who you decide to leave your estate to.
For example, Chris leaves his £700,000 estate to his wife Mary. There is no inheritance tax due on the estate as Chris and Mary are married.
Chris’s £325,000 allowance is passed on to Mary. As well as this, his £175,000 homeowner allowance will pass on to Mary if he chooses to leave his property to her upon his death.
This means that Mary’s tax-free allowance will total £1 million (325,000 x 2 + 175,000 x 2).
If you have any queries about your personal situation and how it may affect the amount of inheritance tax you will have to pay, one of our advisors at Thornton and Baines will be happy to offer you some guidance. Find our details at: https://inheritance-tax.co.uk/contact-us/