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Five Tips To Reduce Your Inheritance Tax Bill

Here we talk about five ways to help reduce your inheritance tax bill

The importance of reducing your inheritance tax bill cannot be overstated as, by doing so, you will leave as much as possible to your loved ones – helping them achieve their hopes and ambitions in your memory.

The good news is that by planning ahead, you can cut your inheritance tax bill with relative ease and effectiveness – whilst also ensuring you can still enjoy your retirement.

What Is Inheritance Tax?

Inheritance tax is the amount of tax liable on a person’s estate when they die. It usually falls to the family to pay this bill and naturally reduces the amount of inheritance for loved ones.

Currently, an individual’s inheritance tax allowance is £325,000. This means that an estate valued up to this amount is not liable for tax. This allowance can be transferred between spouses, enabling a married couple to gift £650,000 tax-free when they die. Anything over this amount is subject to 40 percent inheritance tax.

There are a few exceptions to this so-called nil rate band – gifts between married couples or civil partners, and gifts to a UK registered charity, of any value, are not liable to inheritance tax. Certain business property and farming property are either not taxable or subject to a reduced rate of tax.

From 6 April 2017, there will be an additional nil rate band when a residence is passed on death to a direct descendant, increasing initially by £100,000 and then in annual increments of £25,000 up to £500,000 by 2021. Despite the inheritance tax allowance set to increase from next year, it’s still a good idea to take steps to reduce your tax bill so you can maximise the tax-free amount.

How To Reduce Your Inheritance Tax Bill

  1. Give Gifts

One way to avoid inheritance tax by giving away assets a minimum of seven years before you die. This means you can potentially gift family members tax-free with some planning. There are certain gifts which fall outside of the seven-year-survival rule too, including £3,000 every tax year, and gifts to individuals of £250.

  1. Make A Will

A Will is the best way to detail exactly how you want your estate to be divided after you’ve gone. You can state how your assets are to be distributed, and take advantage of the new residence allowance – by stating your home is to pass to your children you can avoid paying inheritance tax on it. Seek legal advice if you jointly own your home with your spouse, though, as different rules apply in different circumstances.

  1. Pension Payments

From April 2015, pensions are no longer subject to a 55 percent tax rate when the individual dies and the pot is passed to a loved one. If the saver dies before they are 75, the pension can be passed tax-free to a named loved one. So it makes sense to pay into your pension and to transfer other assets into your pension, as these funds and assets will no longer be included in your estate, and therefore won’t be subject to inheritance tax.

  1. Trusts

Placing assets or property into a Trust can be a tax-efficient way of gifting items to beneficiaries in the future, for example, leaving money in a Trust for your children on their 18th birthday or an amount to pay for your grandchildren’s education. Trusts are not part of your estate if you don’t directly benefit from them and so aren’t liable for inheritance tax. If assets don’t qualify for inheritance tax relief, the maximum you can pay into a lifetime Trust without paying tax is £325,000 every seven years. It’s important to seek professional advice on Trusts as there are many legal and financial factors to consider first.

  1. Life Insurance

If you’re worried loved ones won’t receive gifted assets at least seven years before you die and therefore would be liable to pay tax on them, you can take out a life insurance policy against an inheritance tax bill. By stating the insurance pay-out goes into a Trust, this amount would be tax-free and ensure loved ones are still taken care of financially even if your estate is subject to a big tax bill.

Inheritance tax can be costly for loved ones and create a great deal of emotional and financial stress at an already difficult time. By taking steps today to cut and plan for your tax bill, you will be able to leave as much as possible to the people you love.

For professional advice and guidance on your particular circumstances and the most effective ways for you to reduce your inheritance tax bill, please contact our solicitors on 0800 988 3674 or email