How to Minimise Your Inheritance Tax Liability

During this period of great uncertainty, it has never been more pressing to establish the inheritance you will be leaving to your loved ones. However, it’s not just a simple matter of writing a will and stating what you want to hand down, to who, and how it’s distributed. Even with death, there are still taxes to pay.

For reference, the standard rate for Inheritance Tax (IHT) is 40% as of the 2020/21 tax year. IHT is only applied to the amount of the estate that goes above the set threshold however.

Your estate can be exempt from paying any IHT at all if:

  • It’s below the threshold:
    • £325,000 (nil-rate band)
    • £500,000 (if you leave your home to your children or grandchildren)
  • If you leave everything above the £325,000 threshold to:
    • your spouse
    • your civil partner
    • a charity
    • a community amateur sports club

If you aren’t exempt from IHT, there are ways to reduce the amount of IHT that has to be paid out of your estate. Follow these steps to ensure your heirs get as much as they deserve from your inheritance when you pass.

Write A Will

It can be easy to think that it’s “too soon” to start writing a will. As much as we’d all like to avoid having to consider a future for our loved ones without us, it’s better to have our affairs in order before it’s too late.

A will is not just about guaranteeing who gets what from your inheritance. By clearly stating the inheritors and the assets they will receive upon your passing in an official legal document, you avoid leaving your estate to the rules of intestacy. In short, your assets will be distributed according to a rigid set of rules when you don’t have a will.

Letting intestacy rules decide how your estate is passed on can lead to entirely avoidable IHT liability.

Gift Your Assets

The small act of kindness that is gift-giving has the added benefit of minimising your IHT. Every tax year, you can give as much as £3,000 in gifts to any person without it counting toward your estate.

In addition, you can gift the following amount IHT-free every tax year:

  • £1,000 per person for wedding or civil ceremony gifts
    • £2,500 for a grandchild or great-grandchild
    • £5,000 for a child
  • £250 per person as many times as you want

Do note that you must give wedding gifts before the marriage, and the wedding has to happen.

Normal gifts out of your income such as birthday and Christmas presents are also exempt from IHT. For gifts that go above your threshold, the receivers might have to pay IHT if you die within 7 years of giving the gifts.

Gifts are anything with value, including money, possessions, and property. If something is sold for less than its value, the difference in value is counted as a gift as well.

Give to Charity

Aside from your loved ones, you can direct your generosity to noble causes while also keeping your IHT to a minimum. This is because any money you donate to charities that are registered in the UK will be exempt from IHT. The same principle applies when you give gifts to political parties and community amateur sports clubs.

There is an added bonus for your IHT when donating money to charities. If you state in your will that you will leave 10% or more of your estate to any such organisation, the rate of your IHT will be reduced from 40% to 36%.

Create a Trust for Your Assets

A trust gives you a lot of room to breathe when it comes to controlling how your assets can be used even when you are gone. When you place your assets into a trust, they will not be counted as part of the estate you leave upon death. Those specific assets will not be liable to IHT as a result.

You can create a trust for a child or a grandchild, which they can make full use of when they become of legal age without worrying about having to pay taxes for it.

You also have the option to place your assets into an interest in possession trust. So if you were to put shares into such a trust, the beneficiary will receive the income earned from those shares, although they will not have the right to the shares themselves. While such income is free from IHT, you will still have to pay income tax.

Take Advantage of Property Allowances

The house that you want to leave to your heirs will probably take up most of the total value of your inheritance. Thankfully, there are property allowances that you can use to reduce the IHT on your home if you plan to give it to a direct descendant. Note that direct descendants also include step-children, adopted or foster children, and grandchildren.

For the 2020-21 tax year, the property allowance is £175,000 per person. A married couple can then have a combined property allowance of £350,000.

It’s also important to note that if you were to leave your estate to your spouse, they will inherit whatever amount is left of your unused personal allowance of £325,000. In turn, they can leave that remaining amount to their chosen beneficiary when they pass on. It’s possible to add this on top of the combined property allowance to leave to your direct descendants as much as possible of your estate inheritance untouched by taxes.

Have A Deed of Variation

If you feel that you can trust your inheritors to make responsible decisions regarding your inheritance when you pass, talk to them about having a deed of variation.

A deed of variation lets your heirs change your will after you die. It can only be done when two years have passed since your death. The deed can only be valid as long as all the affected beneficiaries agree to the changes.

Your heirs can then make adjustments such as redirecting who gets part of your estate to make it more tax-efficient.

Get Life Insurance

Although a life insurance policy can’t directly minimise your IHT liability, it’s a straightforward way to cover for a hefty tax bill once you have passed. What you can do so that the payout for the policy does not get included as part of your estate is to write the policy into a trust.

You can also pay your premiums without tax if you pay them yourself. HMRC considers such payments as gifts, either as part of your annual £3,000 exemption or as normal gifts out of your income.

Talk to IHT Experts

There is plenty to be worried about during these unprecedented times. Ease your mind and unburden your loved ones of inheritance tax through generosity and smart investments. To help secure your family’s future, contact our IHT experts at Plummer Parsons.