10 Ways To Avoid Paying Inheritance Tax (IHT)

Inheritance tax is a 40% tax applied after a person dies to estates that are worth over £325,000 – or more if a home or the sale pro ceeds of a home are included. In the UK during 2021/22, Brits paid a record £6.05 Bn smashing the previous record of £5.36 Bn paid to the HMRC in 2018/19. The average IHT bill paid in the UK is £213,000, however this figure could be far less if action had been taken during the deceased’s lifetime to pro tect their estates.

Will my estate be liable to IHT when I die?

This question depends on several factors such as the size of your estate, whether you’re married or in a civil partnership, whether you have an interest in a business or agricultural land or intend to leave assets to direct de scendants or not. Everybody is entitled to a tax-free amount of £325,000 (this is called your nil rate band). If you intend to leave your estate to a spouse or civil partner, then IHT will not be payable on the first death. When the surviving partner dies, they can then use the nil rate band of the first to die, meaning a combined nil rate band of £650,000 of tax-free allowance. In the event that this is still not enough to avoid the need to pay IHT, there are additional exemptions such as the Residence nil Rate band which can potentially be used

10 was to avoid paying Inheritance Tax

1. Make a Will

A Will is required when ensuring you estate passes in accordance with your wishes and is especially important where you have children from previous relationships, business partnerships and disabled children. Without a Will, your estate will be distributed under the intestacy rules which may not be how you would have wanted.

2. Stay below the IHT threshold (Nil Rate Band)

As discussed above, the current threshold (or Nil Rate Band) is 325,000 and this figure will remain the same until at least 2026 according to current Government plans.

3. Give assets away

If you gift assets away and survive for 7 years, then you can avoid paying any IHT on the value of the gift. The amount payable is even reduced annually after 3 years from the date of the gift. Each individual can gift up to £3000 per year (or £5000 per year if its for a child’s wedding).

4 Put assets into a Trust

Putting assets into a trust has the effect of removing the asset from your estate, meaning your estate is no longer liable for IHT. Many people chose to place assets into a trust for their child upon them attaining the age of 18 for example. There are many different types of trusts.

5. Put assets into a Trust but still get any income

If you place assets into an ‘Interest in posses sion’ trust, you can still benefit from any generated income whilst avoiding IHT. You will however be liable for income tax.

6. Take out Life Insurance

It is possible to take out a life insurance policy to cover the cost of any IHT liability. The policy can be placed into a trust to ensure it isn’t taxed beforehand and paid outside of your estate.

7. Make gifts out of excess income

You can make ‘gifts out of income’ free from IHT. For gifts to qualify they must form part of normal expenditure, be made out of income and not reduce your standard of living.

8. Give away assets that are free from Capital Gains Tax

If you have assets that have fallen in value since purchase (such as property and shares) they can be gifted without attracting Capital Gains Tax (CGT). Any recovery in the value of the assets would accrue in the estate of the recipient and any gain would be free from any IHT li ability after 7 years.

9. Give gifts to Charity

Any gifts left to charity are free from IHT Li ability. If you leave 10% of the total assets to charity in your Will, then any IHT rate will be reduced from 40% to 36%.

10. SPEND IT!

I don’t wish to tell people how they should spend their money, but it seems to make little sense to live on a tight budget during old age only for your beneficiaries to be taxed 40%. If you have worked hard during your life to build up your assets, you should enjoy them, it maybe worth considering that once in a lifetime cruise or dream sports car.

Talk to us

If you wish to discuss any of the points raised in this article in further detail, please contact one of our experienced Private Client Lawyers here at Blackstone Solicitors on 0161 929 0121 who would be happy to assist.