How Do I Minimise Inheritance Tax Liability?
Inheritance Tax liability is the amount of money paid on the value of a person’s estate (their property, money and possessions), when they die. By understanding the rules about Inheritance Tax it may be possible to minimise the amount of tax paid when you pass away by deciding who you name as beneficiaries in your will, and by making gifts and donations.
Firstly if the value of your estate is below £325,000 then there will be no Inheritance Tax to pay.
There will also be no Inheritance Tax to pay if you leave everything above the £325,000 threshold to your spouse or civil partner, a charity or a community amateur sports club.
The Inheritance Tax threshold can be increased to £500,000 if your home is left to your children (which includes adopted children, foster children and stepchildren), or grandchildren.
If you choose to leave 10% or more of the value of your estate to charity in your will then you would be entitled to a reduced rate of Inheritance Tax on the taxable value of your estate over the Inheritance Tax threshold (from 40% to 36%).
If you give small gifts, up to £250 per person each tax year, then there will be no Inheritance Tax liability, provided you have not used another allowance on the same person.
Birthday and Christmas gifts paid from your regular income are also exempt from Inheritance Tax.
You can give away £3,000 worth of gifts each tax year as your 'annual exemption'. This allowance is carried forward so if you give no gifts one year then you have an allowance of £6,000 available the next year.
Contributions to Weddings and Civil Partnerships
Each tax year you can give a gift to someone getting married or joining a civil partnership up to:
- £5,000 to a child
- £2,500 to a grandchild or great-grandchild
- £1,000 to anyone else
This does not affect your annual exemption of £3,000, which could also be given to a person receiving a wedding or civil partnership gift.
You will not have an Inheritance Tax liability on the amount you pay towards helping with another person’s living costs as long as you can afford the payments after meeting your own usual living costs, and you make the payments from your regular monthly income. These payments include paying rent for your child, payments into a savings account for a child under 18, financial support for an elderly relative.
Potentially Exempt Transfers (PETs)
Larger gifts are called Potentially Exempt Transfers (PETs). If you make a larger gift and survive for 7 years after making the gift, then there will be no Inheritance Tax liability (unless the gift is part of a trust - please contact us for more information).
If you die within 7 years of making a larger gift then there is ‘taper relief’ that will dictate the amount of Inheritance Tax that will be due on the gift:
Up to 3 years - 40% tax
3 to 4 years - 32% tax
4 to 5 years - 24% tax
5 to 6 years - 16% tax
6 to 7 years - 8% tax
- Executors of a will still need to report the value of an estate to HMRC if it is below the inheritance tax threshold.
- If you make a gift but still benefit from it (eg. gifting a house but still living in it), then this will still count as part of your estate for Inheritance Tax purposes.
- Always keep records of the gifts that you have given to help the executors of your estate, including when the gift was given, the value of the gift, and who received the gift.
- If your estate includes a farm or woodland please contact us for further information.
- Figures are accurate at the time of writing