How to cut your Inheritance Tax bill

lovemoney staff
by Lovemoney Staff lovemoney staff on 06 August 2013  |  Comments 8 comments

When you die, make sure you leave as much of your cash as possible to your loved ones, rather than the taxman, with these tips.

How to cut your Inheritance Tax bill

We can’t think of any tax that is particularly popular, but Inheritance Tax is undoubtedly one of the most hated of all  taxes in Britain. And the threshold at which it has to be paid has now been frozen until 2018 at the earliest.

In the last tax year, the amount the Treasury raked in from Inheritance Tax grew for the third consecutive year and is now back to pre-credit crunch levels.

Inheritance Tax is a levy charged against the estate you leave to your loved ones when you die. However, it isn’t applied across the board – your estate must be worth £325,000 or more (or £650,000 for couples).

Should you pass the threshold, everything above that figure will be walloped with a massive 40% tax. Not that long ago, Inheritance Tax only affected the wealthy, but with the astronomical house price rises we have seen over the past decade, more and more of us are leaving estates valued over and above the threshold.

It’s no surprise that people want to avoid shelling out so much after death if they can avoid it!

There is a discount for giving to charity, and there are other ways of cutting your eventual bill. Let's take a look at them.

The charity discount

There's a reduced rate of Inheritance Tax of 36% for those who leave 10% or more of their estate to charity.

The move will hit the Government’s coffers to the tune of around £170 million a year by 2016, but serves an important political purpose – if the Government’s Big Society folly is to work at all, it relies on charities stepping into the breach and filling the gaps left by public sector cuts. And that won’t happen without further funding.

Of course, in reality, your loved ones won’t be any better off if you go down this route – you’ll just ensure that some of your bill goes towards a good cause, rather than to the Treasury! You can find out more information on what qualifies at the HMRC website.

However, there are ways you can actually make a difference to the final Inheritance Bill your estate faces.

Get giving

If you want to sidestep Inheritance Tax, you may want to get giving! We all have a £3,000 limit each year for gifts, which is completely free of Inheritance Tax. What’s more, if you don’t use your allocation this year, it can be carried over to next year, so you can hand over £6,000 to a loved one, tax-free!

You can also give away £250 to any number of people every year, though you can’t combine it with the £3,000 annual allowance.

Weddings also offer an opportunity to avoid Inheritance Tax. Parents can give their children £5,000 each as wedding gifts, £2,500 to grandchildren, or wedding gifts of £1,000 to anyone else. There are hoops to jump through though. The gift must be made (or at least promised) on or shortly before the day of the wedding. If you make the gift after the ceremony, without having promised it earlier, or if the ceremony is called off, it will no longer be exempt.

Related blog post

Indeed, you can even leave cash to a political party free of tax too! However, not all parties qualify – they will need to have at least two members elected to the House of Commons, or one member where the party received at least 150,000 votes. So if you fancy leaving your estate to the Monster Raving Loonies, or the Animals Have Rights Too party (who appeared on my ballot paper in the last set of local elections), your gift won’t be free of tax.

Finally, regular gifts that come out of your income (say a monthly payment to a family member) are also exempt so long as they do not affect your standard of living.

Potentially exempt transfers

You can actually make additional gifts, above and beyond those detailed above, without the taxman trying to claim a slice. These are known as ‘potentially exempt transfers’.

All you have to do is live for seven years after making the gift. If you die within seven years of making the gift, and the total value of the gifts is valued at less than the Inheritance Tax threshold, then it will be added to the value of your estate. However, should the gifts be valued at more than the Inheritance Tax threshold, then either the person receiving the gift or the person managing your estate will need to pay Inheritance Tax on its value.

All simple so far, but since this is Revenue & Customs we are dealing with, there’s room for a bit of added complexity! Should you die between three and seven years after making the gift, and the value of the gifts is valued at more than the Inheritance Tax threshold, then the tax due is reduced on a sliding scale. For a full run-down on the ‘taper relief’, check out this section of the HMRC website.

Don’t forget your life insurance

If you have a life insurance policy, should you die, the payout to your relatives may actually be subject to Inheritance Tax. That’s because the payout will be added to the value of your estate. What’s more, it can then take months before your family receives the cash. It’s all far from ideal.

However, you can have the policy written in trust. This basically separates the policy from the rest of your estate, ensuring you won’t pay tax on it. It also helps to speed up the process of your family receiving the cash. For a great explanation of how this will work, have a read of Escape this inheritance tax trap.

This is a classic lovemoney article that has been updated

More on tax

How to make sure you’re on the right tax code

How to slash your Council Tax bill

Ten ways to avoid Capital Gains Tax

How to get a tax refund

Beware this tax scam

More: Rate rises will hit 90% of borrowers | Middle class pensioners are doomed!

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Comments (8)

  • IPINLive
    Love rating 15
    IPINLive said

    Foreign assets are often forgotten when it comes to making wills and most countries will have their own inheritance tax laws too. If you have assets abroad (like a holiday home or shares offshore) it is well worth making a will in each country and having a UK "master will" to accommodate everything to avoid paying more tax than you need to.

    Report on 30 March 2011  |  Love thisLove  0 loves
  • oldhenry
    Love rating 343
    oldhenry said

    So the great way to sve ta is give your money away! defeats the object really. One of the most annoying aspects of Cameron to me is teh way he trumpeted and increase up to £1m in the IHT amount and them on getting office immediately froze the existing paltry amount. That, alone ,has taken the Tories off my voting list . This is moneythat we have paid tax on all our lives and they have a final swipe at it. If your are really rich you can set up trusts and buy woodlands, farmland etc. The landed gentry have to follow these plans but don't the 'tax dodgers' mates of the government become resident overseas in a very low tax environment?

    Report on 30 March 2011  |  Love thisLove  0 loves
  • unsworthsteve
    Love rating 23
    unsworthsteve said

    Don't marry a foreigner, unless you can make her/him UK resident or you want to make yourself non-resident.

    No spouse allowance. I can understand why (takes the money outside the UK tax net, so the taxman will never get his hands on it when she/he dies). Nonetheless it means people like me are driven offshore - no such thing as inheritance tax outside a few richer countries (contrary to what the article says) and I fail to see why I should leave the odd million or so to the UK taxman from savings I have made out of earnings that were subject to 40% taxes (now 50%) already.

    I gave already. Bye

    Cue the usual wealth-envy responses you get from my fellow Brits

    Report on 30 March 2011  |  Love thisLove  0 loves
  • nitnot
    Love rating 5
    nitnot said

    Some months ago A video clip appeared on this site - or maybe it was on the 'Motley fool' site - which described how setting up a special type of trust could avoid all inheritance tax liability - but I can't find it! Can anyone help?

    Report on 30 March 2011  |  Love thisLove  0 loves
  • The Bank Manager
    Love rating 79
    The Bank Manager said

    I thought there was a sliding scale of taxation if you have gifted and then passed away within 7 years. Has this changed?

    It would seem unfair (then again, both inappropriate taxation and politics, just are) to be levied at the full rate, when if you die at 6 years and 11 months after the gift was made, your Estate is charged 40%.

    Report on 02 April 2011  |  Love thisLove  0 loves
  • r
    Love rating 98
    r said

    Yesterday, LM was slating Starbucks and Vodafone (in the article "Taxman targets tax cheats in London and the south east" for not paying tax (which they legally avoid) and today you are advising us on how to avoid taxes.

    A case of double standards?

    @oldhenry: I can't imagine that the tories were ever on your voting list, eh?


    Report on 14 February 2013  |  Love thisLove  0 loves
  • RichardSowler
    Love rating 18
    RichardSowler said

    This is a complex area and there are a fbit of confusion here.

    The Bank Manager. The taper relief for a failed PET still stands, starting with a 20% reduction after 3 years and rising to 100% after 7. Claim it at question 4 of form IHT100.

    oldhenry. The people to blame for the failure to raise the nil rate band and the LibDems, so take them off your list too! Put a Conservative Government in next time and it will happen. If you are thinking of voting UKIP, I would ask them first what their policy is - if any.

    unsworthteve. OK to marry a foreigner if they take a domicile in England and Wales, Scotland or Northern Ireland. It is only non-dom spouses who are impacted. Theren is a modest permitted gift now, but it rises to £325k after 5 April.

    Being resident abroad is not enough to avoid IHT on world-wide assets - you have to be non-dom, which is not so simple. You are moving in the right direction, though.

    nitnot. Most trusts became fairly toxic from 2006. The only one I can think of that is really useful these days is a trust for a disabled beneficiary, where the transfer in is a PET and there is no 10-year charge. On the death of the beneficiary the trust fund is treated as comprised in his/her estate. However, you have to have the misfortune of a diabled relative to take advantage.

    Richard Sowler TD

    MA(Oxon) CTA(Fellow) Barrister

    6 Church Road Marina


    Isle of Man IM1 2HQ

    +44 1624 673978

    +44 7624 235000

    Privacy and Confidentiality Notice

    This message is confidential and intended solely for the person to whom it is addressed. It is likely to contain privileged and confidential information. If you are not the intended recipient you must not read, copy, distribute, discuss or take any action in reliance on it. If you have received this information in error, please notify me as soon as possible on the above telephone number. Thank you.

    Report on 14 February 2013  |  Love thisLove  0 loves
  • Basia02a
    Love rating 49
    Basia02a said

    What about Aim shares I understand these are exempt?

    Report on 15 February 2013  |  Love thisLove  0 loves

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