How to Reduce Your Inheritance Tax Bill

Few of us like to think about it, but it’s important to consider the estate you’ll leave to your family when you die. Proper planning can save your loved ones a lot of stress and minimise your inheritance tax bill.

Managing your estate is the first step in finding ways to protect your family financially. Here’s where to start.

Stay below the inheritance tax threshold

Currently, individuals have a tax nil-rate band of £325,000 per person. This means if you’re under the threshold when you die, your loved ones won’t have to pay any inheritance tax on your estate. The threshold will remain frozen until 2026.

Your allowance is also transferable to a spouse or civil partner on death, resulting in a nil-rate band of £650,000 for many couples.

If you’ll likely surpass the threshold, you’ll need to look at ways of bringing down your wealth so as not to incur inheritance tax on your estate.

Look into trusts

A very popular way of securing money and assets for your family is by setting up trusts. Putting property (or anything else you wish) into a trust will separate that asset from your estate, avoiding an inheritance tax charge. That said, not every trust can mitigate your tax liability, so it’s worth talking to an expert.

Another attractive prospect of establishing a trust is the control over said assets. For example, if you’ve set one up for your child, you can put rules on the trust which will stop them from accessing its contents until they reach a certain age.

Give gifts or charitable donations

Every year, you’re allowed to gift certain amounts of money or assets completely tax-free. Depending on the situation, you can give away:

  • £3,000 every year (either to one person or split between several)
  • £5,000 as a child’s wedding gift.

Although, if you give assets away and survive for at least seven years afterwards, all gifts will be free, and you’ll avoid paying inheritance tax.

Similarly, you can give money or assets to a charity completely tax-free, potentially bringing your total wealth below the inheritance tax threshold. If you leave at least 10% of your total assets to charity in your will, the inheritance tax rate on your remaining assets will drop from 40% to 36%.

Manage your will

Drafting and maintaining your will is a significant part of estate planning. Without one, your assets could be given out disproportionately with little to no control and incur a high inheritance tax bill. Remember, there’s no inheritance tax charge on assets inherited between spouses.

Your accountant can advise you on how to divide your estate in a tax-efficient way. This will mean your family will get to keep more of what you leave them.

Spend. Spend. Spend.

If you want to enjoy the fruits of your labour, you could quite simply spend the money you’ve saved. Living on a low allowance just for your beneficiaries to be charged 40% inheritance tax (on anything over the threshold) doesn’t make much sense.

Treat yourself to a nice holiday, or just enjoy retirement to its fullest, all the while bringing your estate under the nil-rate tax band and leaving more for your family. Everyone’s a winner.

Look ahead

There’s no such thing as starting your estate planning too early. The sooner you do, the more efficiently you can plan for your family’s future. We understand it all sounds a bit morbid, but it’s necessary.

To discuss your estate planning options, contact a member of our team.

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