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. 

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    Making Gifts

    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
    Inheritance Tax:

    • 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?
    0-3 years
    No reduction
    3-4 years
    4-5 years
    5-6 years
    6-7 years
    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

    *Important information

    *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 call free on 0808 188 9008 or you can call us on 0207 965 7568 for the London area (Local charges apply) or alternatively call 01380 718199  (Local charges apply).

    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.

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