Inheritance tax (IHT) is a 40 percent tax that applies to total inherited assets above a certain threshold which can often result in a family getting a bill for tens of thousands of pounds when a loved one dies.
An inheritor has to pay the tax on any assets above the value of £325,000 from a single person, or above £650,000 for a couple.
There is a further allowance if a person is inheriting a property that was the main residence of the person who died, including up to £175,000 for a single person and up to £350,000 for a couple.
A key way a person can reduce the tax bill they leave behind for their loved ones is to reduce the size of their estate through giving away gifts.
There are yearly allowances for how much a person can give away IHT-free but a person can make a gift of a larger amount.
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However, in this case the amount will only not be liable for inheritance tax if the person who gave the gift survives for another seven years.
There is a taper relief that applies to the amount meaning the percentage of tax that would apply to the amount reduces as the seven-year anniversary approaches.
This is how the taper relief works:
- Three to four years – 32 percent
- Four to five years – 24 percent
- Five to six years – 16 percent
- Six to seven years – Eight percent
- Seven years or more – zero percent.
In light of the seven-year rule, a person should keep a record of what gifts they have given and who they gave them to, as well as the value of the gift and when they gave it.
This is because the person who deals with the estate will need to work out what gifts they gave in the seven years before their death, to see if any of them are subject to IHT.
A person can give away up to £3,000 each tax year IHT-free divided among any number of people.
This allowance can carry over for one year in which case a person will have up to £6,000 to give away.
An individual can also give away any number of gifts of up to £250 to different people and avoid the tax.
People can also give away gifts IHT-free to a person getting married or entering a civil partnership.
This can include up to £5,000 to a child, up to £2,500 to a grandchild and great grandchild, or £1,000 to another person.
A person can also reduce the IHT bill for their estate by giving away a portion of their estate to charity.
If a person gives away 10 percent or more of their estate to charity, the IHT rate that applies to the rest of their estate will be reduced to 36 percent.
This will be calculated by deducting the amount that is going to charity and then applying the 36 percent tax rate to any total remaining assets above the relevant threshold.
A person may want to seek financial advice to work out how to structure their assets and gifts to minimise their inheritance tax bill.
Another way for a person to reduce their liability is to invest funds in pensions as these are considered to be separate from a person’s estate for IHT purposes.
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