5 min Read
17 Feb 2016

The 10 best ways to avoid inheritance tax

10 ways to avoid inheritance

elderly coupleWhen you die you may want your estate to pass on to your children but having to pay inheritance tax (IHT) may reduce the amount of your estate that ends up in their pockets. This inheritance tax calculator will quickly work out what your potential IHT bill could be.

In this article I look at 10 ways you could prevent the taxman getting his hands on your assets before your children do.

 

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Firstly I suggest that you download this excellent guide to inheritance tax including 10 tips to cut your IHT bill. It is the best guide I’ve found on the subject. Once you’ve downloaded it go to page 10 where you will see a complete list of the exemptions you can claim to reduce your IHT bill. 

The guide will also tell you

  • how you can now pass on your home to your family free of inheritance tax (page 7)
  • the simple ways a pension can be used to eliminate inheritance tax (page 18)

Guide to eliminating inheritance tax

The Inheritance Tax Guide written by award-winning, independent, chartered financial planners. It will guide you through everything you should be doing now to eliminate inheritance tax.

Read the free guide

How to avoid inheritance tax

1. Make a will

Making a will is a major part of estate planning as you can make sure that assets are distributed in line with your wishes. Without a will your assets will be distributed according to intestacy rules and may be liable to inheritance tax (IHT) that could otherwise be avoided.

2. Make sure you keep below the nil rate band

In the tax year 2015/16  the nil rate band for individuals is £325,000. This nil rate band is transferable to a spouse or civil partner on death resulting in a total nil rate band of £650,000 for couples. In the 2015 Summer Budget a new ‘main residence transferable allowance’ was announced which gradually increases from £100,000 in 2017 to £175,000 per person by 2020/21. This sum is in addition to the nil rate band. More information on the new inheritance tax allowance on property can be found here.

3. Give your assets away

If you give assets away and you survive for at least 7 years then all gifts are free of inheritance tax. If you die within 7 years then inheritance tax will be paid on a reducing scale. You can also give gifts totalling £3,000 each year completely free of IHT. You can also gift £5,000 on the occasion of a child’s wedding.

4. Put assets into a trust

If you place assets within a trust they will not form part of your estate on death. You could place assets into a trust for the benefit of your children when the reach the age of 18 for example.

5. Put assets into a trust and still get the income

If you place assets into an ‘interest in possession trust’ you can still take income from the assets (which is liable to income tax)  whilst maintaining the inheritance tax protected benefit of your assets on death.

6. Take out life insurance

You can cover any potential liability for IHT by taking out a life insurance policy for the potential inheritance tax bill and placing the policy in a trust to ensure it is paid outside of your estate.

7. Make gifts out of excess income

You can make ‘gifts out of income’ free from IHT. For gifts to qualify they must form part of normal expenditure, be made out of income and not reduce your standard of living.

 8. Give away assets that are free from Capital Gains Tax

If you have assets that have fallen in value since purchase (property, shares etc.) they could be passed on without attracting Capital Gains Tax (CGT). Any recovery in the value of any assets would accrue in the estate of the recipient and any gain would be free from a potential IHT liability after 7 years.

9. Leave something to charity

Anything left to a charity will be free of any IHT liability. If you leave at least 10% of your total assets to charity then the inheritance tax rate on the remaining assets will be reduced form 40% to 36%.

10. Spend it!

There is little point in living on a tight budget as you grow older and then your beneficiaries get taxed at 40% on some of your assets. If you have worked hard to build up your assets then you should enjoy them to their upmost, maybe a new car or a holiday of a lifetime will add a bit of a spring to your step in retirement.

 

Article overview

Key points

  • Download this excellent guide to inheritance tax including 10 tips to cut your IHT bill.
    • read the full list of exemptions you can use to avoid inheritance tax on page 10
    • make sure you pay attention to how you can pass in your home free from inheritance tax (page 7)
    • note how pensions can be used to avoid inheritance tax when passing on your wealth (page 18)
  • Other tips to avoid inheritance tax also covered:
    • be aware of your IHT nil-rate band
    • use of trusts
    • use of life insurance
    • making a will
    • giving assets away
    • charitable donations

Written by Damien

Damien is one of the most widely quoted money and investment experts in the national press and has made numerous radio & TV appearances. He created MoneytotheMasses.com while working in the City when he became disillusioned with the way the public were left to fend for themselves because they could not afford financial advice.

More about Damien