Ways to reduce inheritance tax
4th Oct 2023 Wills & POA
2 min read
If your estate is sufficiently large, inheritance tax (IHT) may be charged after you pass away. But there are ways you can cut your estate's tax bill and increase the tax-free amount being passed on to your heirs.
Below,
we list some options for minimising your inheritance tax. We suggest you seek
advice before making any gifts or taking any other actions towards planning
your estate.
Leave money to a charity
Any
money you leave to a charity, providing it is registered in the UK, will always
be free from inheritance tax. The same goes for gifts to political parties, or
to local sports clubs.
What's
more, if you leave more than 10% of your taxable estate to one of these groups
in your will, the inheritance tax rate for the rest of your estate will fall
from 40% to 36%.
Leave your estate to your spouse
Your
spouse or civil partner will not usually have to pay tax on assets you leave
them, regardless of the amount. Making the most of this in your will can save
your family a small fortune.
When
your spouse then passes away, they'll have inherited your unused IHT allowance,
potentially allowing them to pass on up to £650,000 tax-free upon their death.
If
they (or you) have remarried, then unused personal allowances can be added
together and passed on - but only up to the value of one whole personal
allowance (i.e. the most it can increase by is £325,000).
Use property allowances
As
well as the standard allowance, there is also an allowance relating to
residential property of £175,000 which is again transferable when the second
spouse dies. Meaning a further £350,000 is available tax-free.
Make gifts
One
of the simplest things you can do to avoid paying inheritance tax (IHT) is to
spend your money, or give it away, during your lifetime. No tax is due on any
gifts you give, as long as you live for seven years after giving them, and you
no longer retain any interest in them.
Each
tax year, you're allowed to give up to £3,000 worth of gifts, split between
however many people you like - this is known as your 'annual exemption'. You're
also allowed to make unlimited gifts of up to £250 to others, too - as long as
you have not used another allowance on the same person.
You
can also carry any unused annual exemption forward to the next tax year - but
only for one tax year.
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