A person can reduce their inheritance tax liability by giving 10 percent or more of their estate to charity. This usually reduces the tax, which applies to total assets worth £325,000 or more, from 40 percent to 36 percent.
Caroline Burke, 72, was hit by a shock £50,000 bill as her deceased aunt’s will did not say if the inheritance tax (IHT) should be deducted before or after the charitable gifts were taken out from the amount, reports The Telegraph.
She acted as executor for her aunt’s estate and thought she had divided the amount correctly between the family members and three charities named in the will.
One of the charities then called her to say their bequeathed amount was £50,000 short. As gifts to charities are exempt from IHT, if an estate is split between charities and loved ones, the family will pay any tax.
Guidance on the Government website outlines a charitable donation in a will either will be deducted from an estate before inheritance tax is calculated.
READ MORE: Martin Lewis’ ‘spot on’ alert sees woman boost state pension by £11,500
The gifts exemption can be carried forward one year into the next tax year, providing a £6,000 allowance in total.
Another opportunity to give gifts IHT-free is when a friend or loved one gets married or enters into a civil partnership.
A person can give up to £5,000 to a child getting married or entering a civil partnership, as well as £2,500 to a grandchild or great-grandchild, or £1,000 to any other person.
Those giving gifts to the same person have the option to combine a wedding gift allowance with any other allowance, apart from the £250 small gift allowance.
READ MORE: Rishi Sunak ‘needs to worry’ about raising tax rate to 25%
This means a person could give a wedding gift of up to £5,000 to their child as well as giving away part or all of their £3,000 annual allowance to them.
People can also give away a larger gift of any amount but they must live for seven years after the gift is given for the amount to avoid IHT.
The amount of IHT to pay on these larger gifts decreases as the years progress towards the seven-year point.
Another way for a person to arrange their finances to avoid inheritance tax is to invest funds in pensions as these are not considered part of a person’s estate.
Pensions also have the advantage of avoiding income tax when a person pays into a pensions scheme.
Under the current personal allowance rules for pensions, a person can pay in up to £40,000 a year and avoid tax.
There is also a lifetime allowance that limits the amount a person can invest in their pensions tax free over the course of their life. This is currently £1,073,100.
The state pension is increasing by 10.1 percent this year, with the full basic state pension increasing from £141.85 a week to £156.20 a week, while the full new state pension is going up from £185.15 a week to £203.85 a week.
