- Inheritance Tax Planning
How to Save Inheritance Tax
In recent years, HMRC has received more Inheritance Tax payments year on year. With Inheritance Tax bills on the rise, and more estates becoming liable for tax payments, it is natural to be concerned about taking steps to reduce or minimise the bill that you may have to pay.
Inheritance Tax (IHT) must be paid on all assets in your estate that exceed the standard threshold, known as the “Nil-Rate Band”, which is currently set at £325,000. Anything above this amount is usually taxed at 40%.
Reducing your inheritance tax bill is a lifelong enterprise, but one significant step can be taken with a carefully prepared Will. At Wise Owl Wills, we can prepare an affordable Will for you, or cost-effective mirrors wills for you and your partner, that account for any strategies that may reduce the level of inheritance tax that you have to pay, enabling you to leave more of your assets to the people you love.
(Tax rules and allowances depend on individual circumstances and can change in the future. This article is not to be treated as current financial advice. For up-to-date regulations check the latest government publication here https://www.gov.uk/inheritance-tax )
Make a Will That Protects What Matters Most
With expert guidance on reducing Inheritance Tax and smart estate planning, we help you create a legally robust will that saves your family money and stress.
How to Reduce Inheritance Tax
There are several ways to reduce or avoid Inheritance Tax, helping you protect more of your estate for your beneficiaries. These include: –
Spouse or Civil Partner Exemption
Leaving your entire estate to your spouse or civil partner. Inheritance tax is not immediately charged on your estate in such circumstances. Instead, it is payable upon the death of your partner after you, in circumstances where they may be able to take advantage of your nil rate band in addition to their own.
Donating to Charity
Any gift that you make to charity will be free of inheritance tax. If you give more than 10% of your estate to charity, any inheritance tax that your estate may have to pay thereafter will be reduced from 40% to 36%.
Making lifetime gifts
If you give away some of your assets in life, and you live for more than 7 years after making the gift, that gift may be exempt from inheritance tax.
Using life insurance effectively
It is possible to obtain policies that pay your inheritance tax bill so that your beneficiaries can inherit your entire estate.
This guide explores each option, helping you to consider which strategies may work for you.
Why Making a Will Matters
Using a professional will-writing service is one of the most effective steps you can take in estate planning. A well-structured will ensures your wishes are carried out and can include tax-efficient arrangements that help reduce, or even avoid, Inheritance Tax.
Whether you want to leave assets to a spouse, use tax-free allowances wisely, or support charities, an affordable will-writing solution can make a significant difference.
Avoiding IHT with the Spouse or Civil Partner Exemption
One of the simplest ways of mitigating Inheritance Tax is through the spouse or civil partner exemption. If you are married or in a civil partnership, you can pass on your entire estate tax-free to your partner, regardless of the value of your estate.
Key Benefit:
Better still, any unused portion of your nil-rate band can be transferred to your spouse or civil partner, effectively doubling the threshold to £650,000.
Using Trusts to Reduce Inheritance Tax
Setting up a trust can be a powerful way to reduce Inheritance Tax. Assets placed in trust may no longer be counted as part of your estate (provided you live for seven years after the transfer). Trusts can offer long-term control while helping beneficiaries receive assets more efficiently.
Important Consideration:
Always seek expert advice before placing assets into a trust. Whilst there may be inheritance tax savings, there may be other charges and tax liabilities that make a trust unsuitable for you.
Gifts to Charity
Charitable gifts made in your will can help avoid Inheritance Tax:
100% IHT-Free
Gifts to qualifying charities are entirely IHT-free
Reduced Rate: 36%
Leaving at least 10% of your estate to charity reduces the IHT rate on the remainder from 40% to 36%.
Lifetime Gifts and the Seven-Year Rule
Giving away money or assets during your lifetime is a common and effective way to reduce inheritance tax.
£250
Per Person
You can make an unlimited number of individual gifts of £250 or less without incurring any Inheritance Tax liabilities, provided that each gift is to a different person.
£5,000
Wedding Gift
You can provide a “wedding gift” of up to £5000 to your children, and up to £2500 to your grandchildren, without incurring a liability.
£3,000
Annual Exemption
In addition, you can make gifts of up to £3000 in any one year without consequences. Such small gifts will be considered to be exempt from inheritance tax.
The Seven-Year Rule
Gifts in excess of £3000 will be considered “potentially exempt” from inheritance tax. If you survive for more than 7 years after the gift is made, no inheritance tax will become due. If you die within 7 years of making the gift, then there may be an inheritance tax charge that will be subject to “tapered relief”. There is no relief at all in the first three years, but there will be a 20% reduction in the inheritance tax liability for each year thereafter that you survive.
Tapered Relief Schedule:
Personal Pensions and Inheritance Tax
Many personal pensions can be passed on outside of your estate, meaning your beneficiaries may receive the remaining pension pot without paying Inheritance Tax. Rules depend on pension type and your age at the time of death.
Important: Rules depend on pension type and your age at the time of death. Consult with a financial advisor to understand your specific circumstances.
Life Insurance to Cover Inheritance Tax
A whole-of-life insurance policy held in trust can provide funds specifically to settle an IHT bill. This ensures your beneficiaries receive your estate without needing to sell assets to pay tax.
Protects Your Estate
Covers the IHT bill directly
Prevents Asset Sales
No need to sell property or investments
Peace of Mind
Your loved ones inherit the full estate
Protect Your Legacy. Reduce Your Inheritance Tax.
Get expert support with a cost-effective will writing service designed to help you minimise or avoid Inheritance Tax.
Book your free consultation today and discover how simple it can be to secure more for your loved ones.