The best ways to reduce inheritance tax - December 2023

Inheritance tax is a tax which is paid on your estate when you die, your estate includes your savings, valued possessions and any property that you own. The more inheritance tax that you pay the less you can pass on to your beneficiaries. Your beneficiaries are the people you want to leave your money and assets to when you die.

If you’d like to minimise the inheritance tax bill that will have to be paid from your estate, there are a number of things you can do. These are simple and easy ways to plan for when you die and potentially remove inheritance tax altogether.


1. Make a will

It is important to make a will because if you die without a will, your family may not receive what you wanted them to have. By creating a will, you can ensure that your wishes are carried out and that your loved ones are taken care of after you are gone. If you don’t make a will there are certain rules which dictate how your assets including money, property or possessions should be allocated. A basic principle in English law is that you can leave your estate to whoever you choose. However, to ensure that your will isn’t challenged you should:

  • Instruct a specialist Wills solicitor to draft your Will, rather than a cheap but unregulated unqualified Will-writer.
  • Keep your new Will in a safe place and destroy any previous Wills.
  • Tell your executors and your loved ones where they can find a copy of your latest Will.

2. Keep below the inheritance tax threshold

The current inheritance tax threshold is £325,000. This is also known as the nil-rate band. This means that you pay no IHT if your estate is below that threshold.

  • If the value of your estate is above the £325,000 threshold, the part of your estate above it might be liable for tax at the rate of 40%.
  • So, if your estate is worth £500,000 and your IHT threshold is £325,000, the tax charged will be £175,000 (£500,000 – £325,000). The tax would be £70,000 (40% of £175,000).

3. Give your assets away

A gift can be anything you give that has value, such as:

  • Money
  • Possessions like jewellery and furniture
  • Property or land
  • Stocks and shares

It can also be something that has decreased in value. For example, if you sell your house for less than its actual value to your child, the difference in value can count as a gift.

If you die within 7 years of giving assets away then inheritance tax is paid on a sliding scale. If you survive 7 years or more then the gifts avoid IHT completely.


4. Set up a trust

Trusts can ensure that your assets easily transfer to your chosen beneficiaries in line with your wishes.

When setting up a trust you can choose which of your assets are held in it; typically these include property, money or investments. You then appoint a set of trustees, who manage your estate plan and pass on assets or income to your beneficiaries.

Trusts help to keep things simple when it comes to managing assets during your lifetime and administering your estate when you die. As a result, they can be a powerful means of helping to reduce your Inheritance Tax bill.

5. Leave a gift for a charity

Many people choose to make gifts to charities in their wills. Gifts to qualified charities can reduce the inheritance tax rate from 40% to 36% if used in the correct way.

The gifts themselves are exempt from inheritance tax regardless of the value of the gift. However, a reduced rate of 36% applies where the individual leaves at least 10% of their net estate, known as ‘the baseline amount’, to charity. The baseline amount is the entire estate in an individual’s sole name (not including assets held in trust, or joint assets that pass by survivorship) fewer debts, funeral expenses and certain IHT exemptions – such as the nil rate band, currently £325,000.

Source: Finance Girl


Category: Tax

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