5 practical ways to reduce your Inheritance Tax bill

When you pass away, there are often many things that you may want to leave behind for your loved ones. This might include anything from fond memories to treasured heirlooms, but a tax bill is rarely one of them.

When estate planning, it is easy to understand why you would want to reduce your Inheritance Tax (IHT) liabilities as much as possible. That being said, it can sometimes be difficult to navigate the potential tax pitfalls when trying to do this.

If you would like to reduce your IHT bill, so that you can leave more money to your loved ones, here are five useful ways to do it.

1. Write a will

As you probably know, having a will in place can have a variety of benefits, not just for the peace of mind that it can give you to know that your wishes will be honoured when you pass away. However, you may not be aware that it can be a useful way to reduce your Inheritance Tax bill.

One of the most important tax allowances you get when it comes to estate planning is the nil-rate band, which stands at £325,000. You can leave assets up to this amount to your loved ones without having to pay tax on them.

However, it’s also important to be aware of the main residence nil-band, which stands at £175,000. If you leave behind your main residence to your children or grandchildren in your will, this gets added onto your nil-rate band, potentially bringing it up to £500,000.

This extra tax allowance can help to cut down the amount of IHT that your family will have to pay when you pass away.

2. Use your gifting allowance

Another useful way to reduce your IHT lability is to make gifts to loved ones, as these will reduce the size of your estate.

Each tax year (6 April to 5 April) you can give away up to £3,000 worth of gifts, and their value is immediately removed from your estate. This is known as your “annual exemption” and can be carried over from a previous year up to the value of £6,000.

On top of this allowance, you can also give an unlimited number of gifts of up to £250 each from your income. You can also give a £1,000 wedding gift to anyone, which rises to £2,500 for grandchildren and £5,000 to children.

You could also use potentially exempt transfers (PETs), which allow you to give unlimited amounts to anyone you choose, providing that you live for seven years. After this point, the gifts fall outside of your estate.

However, if you do not, then the gift could be liable to “taper relief”, which essentially means that IHT is due on a sliding scale, depending on how long you lived after you made the gift. You can see this on the chart below:

It is also worth noting that you don’t have to pay IHT on any gifts that you give to your spouse or civil partner, as long as they live in the UK permanently.

3. Gift out of your excess income

On top of the previous ways to gift money, it is also worth noting that you can make gifts out of excess income, which can be a useful way of reducing your family’s IHT bill.

For these gifts to qualify, they need to form part of your normal expenditure and not reduce your standard of living. These payments also need to be regular, so it’s important to ensure that you can keep up with them.

If you decide to gift in this way, it’s particularly important that you keep good financial records of all the gifts you make. You may also benefit from seeking professional advice, as the rules can be somewhat complicated and running into any unexpected issues can be costly.

4. Put some of your assets in a trust

Another way to potentially reduce your IHT liability is to place some of your assets in a trust. Since assets in a trust are typically not counted towards your estate for tax purposes, you can potentially use this to reduce the size of your tax bill.

However, while this can be useful, it is important to bear in mind that this is an irreversible decision. Furthermore, since there are several different types of trust to choose from, you may benefit from speaking to a financial planner before acting.

5. Take out life insurance

The final way you can reduce the amount that your family would have to pay in IHT is by taking out a life insurance policy. While this option does not technically reduce your liabilities, it does mean that  the tax won’t reduce the overall value of your estate.

Essentially, when you pass away, the policy will pay you a lump sum on your death, which your beneficiaries can then use to pay the tax bill. This means that you can pass on your estate to your loved ones as you wish.

One important fact to bear in mind here is that the life insurance policy itself needs to be placed in a trust, otherwise it can count as part of your estate.

Get in touch

If you want to know more about how to reduce your IHT liabilities, so that you can leave more money to your loved ones, get in touch. Please email enquiries@metiswealth.co.uk or call 0345 450 5670.

Please note

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.

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