Without proper estate planning, Inheritance Tax can cost families thousands of pounds every year. There are a myriad of ways to avoid Inheritance Tax and ensure that what you leave behind is as untouched as possible. In the 2019/20 tax year the Inheritance Tax threshold is £475,000 per person, made up of £325,000 plus the new ‘main residence’ nil rate band of £150,000 (applied when a residence is passed on death to a direct descendant). For estates that are likely to be worth more than this it’s important to find ways to avoid Inheritance Tax to help keep costs down for those you leave behind.
15 ways to avoid Inheritance Tax
The best way to avoid Inheritance Tax will be different for everyone – these are just some of the options that you have.
1. Make a Will.
Ensuring that you leave a Will when you die is one of the simplest ways to avoid Inheritance Tax. If you don’t do this then you’ll have no control over how your assets are distributed after your death. You’ll die intestate, which means that your estate will be divided up according to the rules of intestacy, which may not fit with your wishes. For example if you and your partner have a child, but are not married or in a civil partnership, all of your estate will pass to your child and none to your partner.
2. Get married.
Assets that you leave behind to a spouse or civil partner won’t attract Inheritance Tax. Plus, your partner’s Inheritance Tax allowance will increase by the proportion of your allowance that you didn’t use.
3. Gifts to civil partner or spouse.
If you’re married or you’re currently in a civil partnership, there are no limits on the gifts that you can make to your other half. The only condition is that your other half must have been born in the UK. If they were not then there may be caps on how you can use this kind of gift to reduce Inheritance Tax so it’s important to seek out legal advice.
4. Use the annual £3,000 exemption.
The first £3,000 of whatever you give away every year is Inheritance Tax free because it’s not considered part of your estate when you die. If you don’t use the exemption in one year you can carry it forward into the next – for one year only.
5. Gifts to friends or family.
The best way to avoid Inheritance Tax is often to start giving away what you might want to leave to friends or family earlier in life. Any gifts that you make will be subject to Inheritance Tax but only for a period of seven years. Gifts that you’ve made at least seven years before you die won’t be included in your Inheritance Tax liability. If you’re giving away assets then this may attract Capital Gains Tax so, again, it’s important to get good advice.
6. The use of trusts.
A trust is a useful vehicle to structure what you leave behind and one of the best ways to avoid Inheritance Tax. Trusts can be established now or can come into effect when you die. Any assets that are part of a trust that is created when you die won’t have any Capital Gains Tax consequences but some may arise if you’re transferring assets into a trust during your lifetime.
7. Charitable gifting.
Any charitable gift is free of Inheritance Tax – plus you can reduce what is due on your entire estate by leaving at least 10% of it to charity (this will reduce the Inheritance Tax rate to 36% from 40%).
8. The option of insurance.
Strictly speaking, taking out life insurance won’t reduce Inheritance Tax but it may give those you’ve left behind some resources with which to cover the tax bill.
9. Gifts in consideration of marriage.
You can give up to £5,000 to a son or daughter, £2,500 to a grandchild and £1,000 to anyone else who is getting married. Up to those limits the gifts that you make will be tax free no matter when you make them.
10. Opt for £250 a year.
Another simple way to transfer cash without attracting Inheritance Tax is to limit this to £250 a year. There is no Inheritance Tax on a gift of less than £250 to any one recipient per tax year. This amount is also excluded from the annual gift exemption. So, for example, you could gift £250 to every single one of your living relatives every year and, as long as you didn’t go above this amount, no Inheritance Tax would be due.
11. Leave money to a political party.
Another way to reduce Inheritance Tax is to leave a financial gift to the political party that you support in your Will.
12. Using pensions.
Your pension remains one of the best ways to avoid Inheritance Tax. For example, if you die before the age of 75, benefits left in a money purchase pension can be paid – tax free – as a lump sum or drawdown income to a beneficiary.
13. Discounted gift trusts.
The way this type of trust works is that the trust purchases an investment bond that provides up to 5% of tax efficient income until you die. If you die within seven years, the Inheritance Tax bill is less as a result of the income that has been withdrawn. If you survive the creation of the trust by seven years there will be no Inheritance Tax to pay.
14. The use of investments.
There are some investments that offer ways to avoid Inheritance Tax, as they qualify for Business Relief. This is the case with a number of shares listed on the Alternative Investment Market – and also any cash you have put into Enterprise Investment Schemes – after a period of two years of investment has passed.
15. Property ownership.
The way that you own your home can impact on how much Inheritance Tax is due. For example, joint tenants automatically pass their share to a surviving spouse on death whereas tenants in common can leave their defined share to anyone. There can be benefits in terms of Inheritance Tax and also reducing long-term care costs.
With all these ways to avoid Inheritance Tax it’s important to seek advice to ensure that you use the right methods for you.