Five ways to slash your inheritance tax bill and pass on more to loved ones

Thousands more families are being caught up in the inheritance tax (IHT) net as frozen thresholds are deeming smaller estates liable for a hefty bill.

IHT receipts for April and May 2023 amounted to a staggering £1.2billion, which is £0.1billion higher than the same period a year earlier, recent data published by HMRC shows.

Shona Lowe, financial planning expert at investment company abrdn, said: “Inheritance tax is no longer the ‘wealth tax’ it once was.

“Thanks to years of soaring property prices across the country, alongside the freeze of the ‘nil-rate’ band, which has been in place since 2009 and will remain until at least 2028, more people are caught in the IHT net and the total amount paid in IHT is increasing year on year.”

Ms Lowe said recent freezes, taken together with reductions in the capital gains tax allowance and dividend allowances, “could mean a bigger tax bill overall”.

She added that this makes it “more important than ever” that people understand all the allowances available and do what they can to make the best use of them.

Make a will

To remove some of the tax burdens, experts suggest a good first step is to make a will – but seeking professional help is key.

John Roberts, partner and director of Austin Lafferty Solicitors, a Glasgow-based firm, said: “We are all likely worth more dead than alive – at least all our assets will be encashed, one way or another, on death.

“Anyone with insurance, a job, a business, a home, a family must get advice on making a will. Never use any online service without face-to-face human professional advice. The will should meet all the likely outcomes and potential scenarios – sudden death, death through illness, old-age demise, death before one’s spouse, death after the spouse, death at the same time as a spouse and more.”

Make the most of gift allowances

Giving lifetime gifts is another way to reduce the value of a person’s estate and therefore reduce their potential inheritance tax bill.

Ms Lowe said: “Some gifts are exempt, which means the value of them leaves your estate immediately. There is the ‘annual exempt amount’, which allows you to gift up to £3,000 each year split between as many recipients as you like.”

There is also a ‘small gift exemption’, which allows people to make as many gifts of up to £250 in a year, as long as each one goes to a different person.

Ms Lowe continued: “You can also give away any income you have that you don’t need to fund your current lifestyle, provided it’s a pattern of gifting and again, the value of those regular gifts will leave your estate immediately.”

However, those who give a gift that doesn’t fall within one of those exemptions will need to survive for at least seven years after giving it in order for its value to leave an estate without having to pay the tax.

Consider trusts

For those who have concerns about making gifts directly to another person, looking into making that gift into a trust could be another option instead.

Ms Lowe said this “can be complex” and is an area where specialist advice is really important but on a basic level, it’s about working out the following points:

• What they want to gift (for example, money, investments or a property)
• Who they would like to have control over it and make decisions about that gift after they’ve made it (the person’s trustees, which can also be them)
• Who they would like to be able to benefit from that gift going forward (the beneficiaries, which can’t include the giver if they’re doing it for inheritance tax purposes)
• How they would like that to work (the trust deed).

Ms Lowe said: “Most gifts into a trust will take seven years to leave your estate completely and if they are over your nil rate band, there may also be inheritance tax to pay when the gift is made.”

Depending on what assets are put into the trust, people may also need to consider capital gains tax and other taxes too, making specialist advice “critical” here.

Make use of allowances

Currently, the single person’s inheritance tax threshold is £325,000 and is referred to as the nil-rate threshold. Inheritance tax is only ever paid if the value of the estate exceeds this figure, after which a 40 percent tax is applied.

Married couples and civil partners are free to leave their whole estate to their partner when they die, free of tax.

However, Ivana Sidey, a solicitor at Birketts noted: “If you take the classic example of a married couple leaving everything to each other, and then leaving everything to their children on the second death, the surviving partner can add the unused £325,000 nil rate band and the £175,000 residence nil rate band to their own allowances.

“This means they can leave an estate of up to £1million to their children before it will be chargeable for IHT.”

Make a charitable donation

Another way to reduce the 40 percent tax rate on the qualifying estate is by making a charitable donation.

Mark Greer, managing director of philanthropy services at the Charities Aid Foundation, said: “A gift to a UK charity is free from inheritance tax, meaning that the money is ‘removed’ from the value of a donor’s estate before tax is calculated.”

In addition to the donation being tax-free, Mr Greer said that gifts to charities can reduce the amount of inheritance tax paid on the rest of the estate, but the gift must amount to at least 10 percent of the estate.

He said: “If 10 percent or more of the estate is gifted to charity, then the rate of inheritance tax paid on the rest of the estate is reduced from 40 percent to 36 percent. Gifts in Wills can therefore make a difference to the causes that donors care about the most, whilst having a positive impact on the remainder of their estate.”

To find out more about inheritance tax and ways to plan more effectively, click here.