Inheritance Tax (IHT): Ways to Limit Your Potential IHT Liability

After paying tax for a lifetime, it may seem unfair to then be taxed on the wealth you leave behind. Traditionally, IHT didn’t impact many people because the thresholds were set very high, but with rising house prices many more people may now fall victim, and part of your estate could be subject to a 40% tax charge upon death.

IHT is a 40% tax levied on a deceased’s estate. It is normally possible to pass on your estate to a spouse or civil partner completely tax-free on death but children and other loved ones can’t benefit in the same way.

If the estate is worth more than £325,000, the current threshold or ‘nil rate band’, IHT of 40% applies to the excess.

In April 2017 the new ‘main residence nil-rate band’ was introduced. It starts at £100,000 and will increase by £25,000 a year until it reaches £175,000 in 2020.

When estate planning and looking to limit any potential IHT liability, consideration may be given to the below:

1.   Make a Will

This is the most basic, but often most neglected, form of estate planning. Without a will, your estate will be distributed according to predefined rules and could result in a larger share going to the Government.

2.   Gift it Away

Individuals can gift away assets during their lifetime. People have an annual £3,000 tax-free gift allowance, known as the annual exemption. If allowances have not been used in the previous year then this can be carried forward giving an annual exemption of £6,000 in the next tax year. The money is immediately outside their estate so there will be no IHT to pay.

3.   Larger Gifts 

Larger amounts can be made but the donor must live for at least seven years after making the gift for it to be completely IHT free.

4.   Make Full Use of Pension Allowances 

Pensions, including those in drawdown, are free from IHT and can be passed on tax efficiently. So, individuals can look to take full advantage of any pension allowances.

5.   Set Up A Trust

Trusts can be extremely useful when estate planning and can be effective at reducing the estate’s value and therefore the potential IHT charge. Again, the seven year survival rule may apply depending on the type of trust set up.

6.   Life Insurance

Instead of gifting wealth away, taking out life insurance can be an option to consider. A policy can be set up to pay an amount equal to your estimated IHT liability. It is also possible to set this up in trust so that it remains outside your estate when calculating a value. The sum assured would then be paid out to the nominated beneficiaries which would allow them to meet any IHT bill which may arise.


HMRC https://www.gov.uk/inheritance-tax

Should you require any further information on estate planning, or any other area of financial planning, please do not hesitate to get in touch.


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