There are several strategies to reduce your inheritance tax liability, including:
- Gifting: You can give away up to £3,000 each year and immediately fall outside of your estate. There are additional allowances for weddings. Larger gifts will not fall outside of the estate immediately, but may be exempt from inheritance tax if you live for seven years after making them.
- Gifting from regular income: You can make regular payments to another person, for example to help with their living costs. There’s no limit to how much you can give tax free, as long as:
- You can afford the payments after meeting your usual living costs
- You pay from your regular monthly income
- Trusts: Setting up a trust can help remove assets from your estate, although these will follow the same rules as making gifts to individuals in that the money gifted to a trust, in excess of the gifting allowance, will still be included in the inheritance tax calculations for up to the first 7 years. Depending on the trust type used, there may also be immediate tax charges. A discounted gift trust may offer some immediate relief for inheritance tax.
- Charity donations: Gifts to charities are exempt from inheritance tax, and if you leave at least 10% of your net estate to charity, the IHT rate on the remainder of your estate can be reduced to 36%.
- Life insurance: Whilst this doesn’t reduce the inheritance tax liability, taking out a life insurance policy written in trust can provide a lump sum to cover the tax liability.
- Pension funds: Pension funds are typically not included in your estate for IHT purposes, so leaving money in your pension can be tax-efficient.
- Spousal exemption: Transfers between spouses or civil partners are exempt from IHT.
- Business relief: Trading businesses may be exempt from inheritance tax. There are also some financial products which make use of the rules about what does and doesn’t qualify for business property relief. Using these types of products can be high risk compared to more traditional collective investment funds however, invested funds could be inheritance tax exempt after 2 years.