How to reduce inheritance tax

You may want to leave an inheritance to your loved ones when you die, but how much you leave and how much tax they’ll have to pay depends on how you manage your assets in the years before you pass.

Through careful inheritance tax planning you could reduce your inheritance tax bill significantly – many people can save a considerable amount.

What is inheritance tax planning?

Inheritance tax planning is about planning ahead and managing your assets in such a way to avoid inheritance tax. There are several legal strategies that you can use to reduce your inheritance tax bill, prevent HMRC from getting your hard-earned cash, and pass as much wealth onto your loved ones as possible.

Many people believe that only very wealthy families are liable to pay inheritance tax, however that is not the case. Property prices are increasing and we’re living longer which means more of us are paying inheritance tax.

The average inheritance tax bill in the UK stood at £197,000 in 2017/18, and people in London and the South East are paying even more¹.

With such huge sums of money going to HMRC every year, the sooner you begin planning the better.

How to avoid inheritance tax

Everyone’s circumstances are different and so what is suitable for someone else may not be suitable for you. With this in mind, it’s important to seek advice from a qualified financial adviser who will be able to assess your individual circumstances and recommend the most suitable ways to reduce inheritance tax.

Here are 6 ways to legally avoid inheritance tax:

1. Write a will

Writing a will is one of the first rules of inheritance tax planning, although many UK adults do not have a will in place.

Without a will your assets will be distributed solely according to intestacy law. As a result, your loved ones could end up paying more inheritance tax than necessary and your assets might be left to someone you hadn’t planned to leave them to. A will enables you to clearly outline what you’d like to do with your money, property, and possessions once you die.

2. Gift money and assets while you’re still alive

One of the easiest and most simple ways to reduce your inheritance tax bill is to gift while you’re still alive. However, if you give away more than £325,000 worth of assets in the 7 years before you die, those gifts will be counted as part of your estate and will be subject to inheritance tax.

Tax is charged on a sliding scale up to 40% of the amount gifted that exceeds the £325,000 threshold.

3. Put your assets into a trust

By placing your assets in a trust, they will be exempt from inheritance tax as they will no longer form part of your estate. Trusts are typically set up for children and used to save for them until they reach the age of 18, although many people do not realize they can also be used to protect assets from inheritance tax.

4. Write your life insurance policy in trust

If you’re a homeowner, you will likely have a life insurance policy that pays out a lump sum or a regular income to your beneficiaries when you die. However, upon receiving the insurance payout, your loved ones could unexpectedly be hit with an inheritance tax bill for up to 40% of the value of the payout.

By writing your life insurance policy in trust, it will not form part of your estate and will therefore be exempt from inheritance tax.

5. Enjoy your hard-earned cash

Simply spend your money! You’ve spent decades earning, saving, and growing your wealth, so why not enjoy your hard-earned cash throughout retirement?

When you die you can leave up to £325,000 to loved ones free from inheritance tax and, in addition to this, you might qualify for the residence nil rate band (RNRB). The maximum available RNRB in the tax year 2020 to 2021 is £175,000. Although anything above that amount will be subject to tax and so, if you have already spent it, you cannot be taxed on it.

6. Leave your estate to your spouse

Usually, there is no inheritance tax to pay if either:

• The value of your estate is below £325,000

• You leave everything above the £325,000 threshold to your spouse or civil partner

Assets inherited between spouses are exempt from inheritance tax regardless of the value of the estate. Also, when someone dies, their personal inheritance tax allowance is transferred to their spouse or civil partner, this means the threshold is doubled from £325,000 to £650,000 (2020/2021).

There are several ways that you can legally avoid inheritance tax, although the rules are very complex. It is recommended that you speak to a qualified financial adviser or a wealth manager to identify the most suitable strategies for your individual circumstances.

At Frizzell Wealth Management, based in Oxford, we advise clients on estate planning and inheritance tax planning to ensure they retain and pass on as much wealth as possible to their loved ones.

The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.

Will writing and Powers of Attorney involve the referral to a service that is separate and distinct to those offered by St. James’s Place and along with Trusts are not regulated by the Financial Conduct Authority.

¹ HM Revenue & Customs, Inheritance Tax Statistics, 2017-18