Reduce Inheritance Tax in 5 Easy Steps

Inheritance Tax is one of the most hated taxes levied on Britons; indeed, in a recent survey it came just below Council Tax in terms of unpopularity. The nil-rate band, above which Inheritance Tax (IHT) must be paid on your estate, is currently set at £312,000 for an individual and £624,000 for a married couple or civil partners. While plummeting property prices have meant that fewer households are now within the IHT bracket, it is vitally important that you plan for the future. Property prices will rise again, and hundreds of thousands of people will be at risk from IHT.

It is important to remember, however, that there are several simple measures that you can implement in order to mitigate or eliminate your IHT liability. These five easy steps will help you reduce your Inheritance Tax bill.

Get Married

Unfortunately, couples living together but not married are treated badly under the IHT regime in comparison to married couples or those in civil partnerships. Married people can pass their assets to their spouse without incurring an Inheritance Tax liability. This effectively means that the couples’ nil-rate band is increased to £624,000. However, this does not apply to unmarried couples; indeed, in these cases the assets may even go to probate.

Make a Will

Your will should be the foundation of your inheritance planning efforts. An effectively written will ensures that your wishes will be adhered to upon your death, and can have significant tax consequences. Drawing up a comprehensive list of all your assets should be the first step here; indeed, doing so will make clear whether or not you will be affected by IHT at all. It is important that you revisit your will after major ‘life events’ such as marriage, birth or the purchase of a house or other large asset.

Consider Your Investments

While there are many tax efficient investments, such as ISAs, most of these still attract an Inheritance Tax liability. However, if you are looking for an investment that is free from IHT you may consider putting money into stocks listed on the Alternative Investments Market, or AIM. Once you have held these stocks for two years they become exempt from IHT.

Set Up a Trust

If your assets exceed the nil-rate band and you want to reduce your IHT bill as far as possible, you should consider setting up a trust. Testamentary trusts function by separating the settlor (that is, the individual establishing the trust) from their assets in a legal sense, thus ensuring that they are not treated as part of the settlor’s estate. More information on setting up testamentary trusts is available in articles elsewhere on this site.

Give Away Assets

Gifts are exempt from Inheritance Tax, with certain caveats and restrictions. In the first instance, any gifts up to a value of £3,000 are exempt. It is possible to carry over any unused allowance to the next year. However, gifts above this value are treated as ‘potentially exempt transfers’. This means that they will be subject to IHT if you die within seven years of making them. As such, it is wise to plan ahead and, if you wish to give away a large amount, to spread it over a number of years.

Inheritance Tax can be very costly for your beneficiaries. However, with some forethought and a little research, there is no reason that they should be affected by it.