Ways to reduce inheritance tax

Ways to Reduce Inheritance Tax

The government may be planning to take everything you own to pay for your care home. But if there’s anything left, you could be hit with a massive Inheritance Tax bill. Don’t even want to think about it? We don’t blame you, but if you ignore it, the chances are it could out to be even bigger than it had to be.

Inheritance Tax (IHT) may well be the greatest amount of tax that you and your family will ever pay. Yet most people do nothing about it and just leave their executors to pay after they are gone.

However, there are ways you can reduce your IHT bill, and we are going to cover some of them in this blog.

First… work out the potential liability

The first thing you need to do is check to see if you are likely to be subject to IHT. Each individual has an allowable amount up to £325,000 and after that inheritance tax will be applied at 40%. Transfers between husband and wife are exempt from inheritance tax, so the combined amount for a couple is £650,000.

f you think this puts you in the frame for inheritance tax, then it’s worth looking at measures to reduce it. We can help you complete your “Personal Balance Sheet” so you can get a better idea of where you stand.

Things you can do to reduce inheritance tax

Give it away now (1)

Make a one-off gift

We’re already established that your IHT allowance can transfer to your spouse or partner when you die. You can also gift anything you want to family or anyone else without them having to pay IHT. But you must outlive the gift by seven years or more. Planning these actions well in advance will protect your family from paying tax.

Whatever you give, keep a record of it: who you gave it to, what you gave them, when you gave it and how much it is worth. This will make matters easier and more transparent for the executor of your will to work out what parts of your estate are due for IHT.

Use your Annual Gift allowance

If don’t want to make a gift of large parts of your estate, or it’s not practical to do so, you can make gifts totalling up to £3,000 per year tax free.

There are certain other gifts you can make to your family that are outside the scope of IHT, but they are quite restricted.

Unfortunately, but predictably for taxes, the rules here are very complex, so good records are essential. Seek advice from your financial advisor to make sure you are keeping within what is allowable by the law.

Give it away now (2)


Not sure whether you are able to leave something to your favourite charity or not? Remember that if you leave 10% (or more) of your ‘net estate’ (what is left of your estate after the £325,000 allowance) to a charity, then the tax you pay on that remainder (your net estate) is reduced from 40% to 36%. Equally, you could make a gift to charity now, and claim tax relief while you’re alive.

Put it in a trust

Another possibility is to use a trust. The rules are complicated and getting it wrong can negate the tax benefits so it is essential to seek guidance from a professional.

Get Insurance

Life insurance won’t prevent you from paying IHT, but it may cover most or all of the inheritance tax bill. But Be Careful. If you don’t put your life insurance payout into a trust, it will count as more wealth and make your tax bill even bigger.

Transfer Your Business or investments

Business Property Relief (BPR) provides relief from Inheritance Tax (IHT) on the transfer of relevant business assets at a rate of 50% or 100%. Need we remind you to seek advice – there are traps and pitfalls.

Some investments, such as unquoted shares, are not subject to inheritance tax.

Make a will

In addition to making sure your fortune is distributed the way you want, a well-structured will is a key component of your inheritance tax planning

Extra relief for your home, maybe

Finally, changes in April 2017 brought in a ‘main residence nil rate’ band. This allows for less inheritance tax to be paid when a property which was the deceased’s main residence is left to a direct descendent. This means it only applies to the deceased’s children (including adopted children, foster children and step-children) or grand-children. The additional allowance is £175,000 or £350,000 for a couple, allowing you to pass on a property worth up to £1 million without tax. However, if the total estate is worth more than £2 million, the additional allowance starts to taper off, and is lost completely for estates above £2.7 million for a couple (£2.35 million for a single person).

So there are lots of ways to reduce the IHT liabilities for your estate. It is a particularly complex area, so always seek professional advice before you act.

Contact us if you would like to be put in touch with an inheritance tax expert – part of our in-house financial advisors’ team – who can guide you through the options.

Are you ready?
Then let’s begin.

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