Reducing or managing an Inheritance Tax bill
Inheritance Tax (IHT) is complicated and difficult to navigate without expert advice. In this guide we will try to make things as clear as possible for you.
Reducing or managing an Inheritance Tax bill
There are several ways to manage or reduce an Inheritance Tax bill. This is known as estate planning. Spending or giving away your assets is the simplest form – but there are many other options.
Need help with Inheritance Tax?
Our friendly specialists are here to help you and can offer information and a free, no-obligation quote over the phone.
Gifting is often the most straightforward way to reduce a potential Inheritance Tax bill. Giving away money or assets will reduce the value of your estate, which could therefore reduce the size of your eventual Inheritance Tax bill. Gifts have different Inheritance Tax treatments depending on the value of the gift, when it was
made and who it was given to.
Tax Free Gifts
Certain gifts leave your estate immediately after being made, and are therefore free from
• Gifts to your husband, wife or civil partner (as long as the UK is their permanent home)
• Gifts up to the value of £3,000 a year (your annual gifting allowance). The £3,000 can be split between as many people as you like, and if you don’t use it you can carry it forward one year for a maximum allowance of £6,000
• Small gifts of up to £250. You can make as many of these gifts as you like but they can be no more than £250 per person
• Regular gifts out of excess income, as long as they won’t affect your normal lifestyle
• Gifts to charities, museums, universities, sports clubs, and some political parties
• Gifts of up to £5,000 to your child when they get married (or £2,500 to your grandchild)
The Seven Year Rule
Most gifts that are not immediately tax-free are considered potentially exempt. You need to survive for a minimum of seven years before these gifts are free from tax and leave your estate completely.
If you die within seven years of making a potentially exempt gift it will reduce the nil rate band available on your death, meaning there may effectively be Inheritance Tax to pay on it.
However, if the value of your gifts is higher than your available nil rate band then the recipient of the gift could benefit from taper relief. This reduces the amount of Inheritance Tax over the seven years:
How long ago was the gift made?
How much is the Inheritance Tax reduced?
More than 7 years
No tax to pay
Making Gifts in Trust
Trusts make it possible to give gifts to others while keeping control over the money. Usually, when you set up a trust you can choose who receives the gift, when they receive it and what they can use it for. Many people make gifts in trust when the beneficiary is:
• Too young or inexperienced to look after the money.
• In ill health or has certain disabilities.
• Going through divorce or bankruptcy proceedings.
You can also use certain trusts to make a gift while still benefiting from the money. For example, you could give away an investment while keeping any income it pays, or keep an investment while giving away its growth.
Claiming Business Relief*
Under Business Relief rules you may be able to reduce the value of your Inheritance Tax bill by owning or investing in a business. You can claim Business Relief on:
• A business or interest in a business (including a sole trade and partnership).
• Land, buildings, or machinery owned by a partner or controlling shareholder of a business.
• Unquoted shares such as those listed on the Alternative Investment Market (AIM).
You will need to own the assets for at least two years before you can claim Business Relief on them.
Some assets become completely free from Inheritance Tax under these rules, whereas others only receive 50% relief – and there are also several exceptions. The rules can be complex, and investing in smaller companies can be higher risk, so if you are interested in Business Relief you should consider speaking to a financial planner.
Setting Up Life Insurance
One of the simplest ways to manage Inheritance Tax is to take out a life insurance policy that pays a lump sum into a trust for your beneficiaries’ benefit when you die. The money will remain outside your estate and can then be used to settle your Inheritance Tax bill. This can help to avoid a difficult situation where your beneficiaries will need to find the cash to settle your bill from elsewhere.
There are different types of life insurance but one of the simplest is a ‘guaranteed’ policy. With this type of policy, the premiums are fixed for the rest of your life and your beneficiaries are guaranteed a pre-agreed lump sum when you die.
You should bear in mind that an insurance policy will end if you do not make payments and there will be no cash value unless a valid claim is made.
Find out more about the different options for estate planning by contacting us on 0808 188 9008
*There is a liquidity risk with Business Relief investments: investors may have difficulties selling their
investment. Investments in unquoted and smaller companies may fail and you, or your beneficiaries,
may not receive back what you put in. These investments may lose their tax status through decisions
made by the investment manager or through a change in legislation. Business relief qualifying status
is assessed on death and cannot be guaranteed.
You can also fax us on 0844 884 8509. at 11p and up per minute from a fax machine.
Correct as of 1-1-2021
Please note: do not call the fax number from a mobile phone as you will be charged 50p per minute and you will not be able to speak to anyone.
Probate Specialist Limited, 5th Floor, 167-169 Great Portland Street, Marylebone London, W1W 5PF
Probate Specialist Limited 126, High Street , Marlborough SN8 1LZ
For general email purposes, you can email email@example.com
You can also email your specialist directly on, firstname.lastname@example.org
Please note: specialistname refers directly to the name of your specialist. You can find further information on the name of your specialist on the about us page.
Probate Specialist Limited, The Office, 21 Ferozeshah Road, Devizes, Wiltshire SN10 2JQ
Company Number: 13015149
ICO Reg Number ZA807624
Rise to the top
Helping Our Clients
Our main focus is helping our clients. Tax systems are difficult and cumbersome, our qualified accountants have years of experience dealing with tax affairs.
count on us
The Inheritance Tax Experts
We have extensively trained in Inheritance Tax and we believe that we have the best systems in place to deal with your Inheritance Tax in a fast efficient and accurate manner.
Right First Time
Our systems are constantly checked on a daily basis to make sure we are capable of dealing with anything that can literally be thrown at them