Inheritance Tax: What Is It and Who Has to Pay?

Inheritance tax is a levy imposed on the estate of a deceased person before the assets are distributed to their beneficiaries. The tax is typically calculated as a percentage of the total value of the estate, above a certain threshold. In the UK, for instance, inheritance tax is levied at a rate of 40% on the value of the estate that exceeds £325,000. However, this threshold can be higher if the estate is passed to a spouse, civil partner, or a charity, or if the estate includes a family home.

If the total value of the estate is below the threshold, no tax is due. Additionally, certain exemptions and reliefs can reduce the taxable amount. For example, if a person leaves everything to their spouse or civil partner, there is no inheritance tax due, regardless of the estate’s value. Similarly, gifts made to charities are also exempt.

However, with property prices and accumulated wealth often pushing estates over the threshold, many individuals and families find themselves facing significant inheritance tax bills. This makes it essential to consider ways to legally reduce or avoid this tax, ensuring that more of the wealth stays within the family.

 

How to Legally Avoid Inheritance Tax

  • Gifting Assets During Your Lifetime: One of the most effective ways to reduce inheritance tax is to give away assets during your lifetime. This strategy takes advantage of the fact that gifts made more than seven years before your death are generally exempt from inheritance tax. There are also annual gift allowances, such as the £3,000 yearly exemption per person, which can be used to transfer money or assets without incurring tax.
  • Use of Trusts: Establishing a trust can be a powerful tool for managing your estate and potentially reducing inheritance tax. Trusts can hold assets on behalf of beneficiaries, ensuring that these assets are not considered part of your estate for tax purposes. Different types of trusts offer varying levels of control and tax efficiency, so it’s advisable to seek expert advice to determine the best approach for your situation.
  • Investing in Exempt Assets: Certain investments are exempt from inheritance tax if held for a specified period. For example, shares in qualifying businesses or agricultural property may be exempt if they are held for at least two years before death. This approach not only helps in reducing the taxable value of the estate but also allows for potential growth in the value of the exempt assets.
  • Transferring Assets to a Spouse or Civil Partner: Transfers between spouses and civil partners are usually free from inheritance tax. If you are married or in a civil partnership, you can transfer assets to your partner without any tax implications. Additionally, any unused inheritance tax allowance from the first partner to die can be transferred to the surviving partner, effectively doubling the threshold.
  • Charitable Donations: Leaving a portion of your estate to charity can reduce the overall inheritance tax burden. Not only are charitable donations exempt from inheritance tax, but if you leave at least 10% of your estate to charity, the tax rate on the remaining estate may be reduced from 40% to 36%.

 

Saving money by avoiding Inheritance tax

By utilising some or all of the strategies above you can significantly reduce the inheritance tax that you could be liable for which will save money. This allows you to pass on more wealth to your family. It is recommended that you consult with a financial advisor for your personal circumstances to make sure everything is completed appropriately.