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Tips To Avoid Inheritance Tax – Part 1

25th November 2019

Tips To Avoid Inheritance Tax – Part 1

No-one likes paying tax. While taxes are necessary to fund public services, it doesn’t make them any more popular. But luckily there is one tax at least where we can all take steps to reduce the sum payable to the taxman – maybe even all the way down to zero. It is perhaps the most unpopular tax of all, inheritance tax.

Here are some tax-avoiding techniques that are really simple and do not require expensive or elaborate tax planning to put in place. They are also perfectly legitimate – there’s no risk of them being challenged.

Inheritance tax is a tax on your estate when you die, and so the smaller your estate the less tax there is to pay. In fact if your estate is worth less than £325,000 then no tax at all will be payable. But anything above that is taxed at 40%.

Give it all away…

The first tip is an obvious one: give it away before you go. After all, you can’t take it with you. If you make gifts of money or other assets during your lifetime, and your estate is lower than £325,000, then there will be no tax to pay.

Even if you do not want to reduce your estate to that level – and it is difficult to predict how much someone will need to live on as the years go by – it may make sense to give away some of it. If your estate is worth £500,000 then inheritance tax of £70,000 could be payable, whereas if you had previously given away £100,000 the tax would be only £30,000. Your family (or other beneficiaries of your estate) would receive £40,000 more.

… or give away some of it

The second tip is to give away small amounts if and when you can over the years. This is because if you give larger gifts in your lifetime, any given in your final 7 years will be included in the value of your estate to calculate inheritance tax.

As an example, let’s say Mrs A takes £150,000 out of her pension fund to give £50,000 each to her three children to get them on the property ladder. She then passes away 6½ years later. That £150,000 – probably now half-forgotten – will be ‘added back’ to Mrs A’s estate to calculate the inheritance tax payable.

I know from my clients that this is regarded as a particularly unfair part of tax law.

The good news is that there is a way of avoiding this. You can gift smaller sums each year which do not need to be added to your estate when you die. You can give away a total of £3,000 every year in small lump sum payments (or £6,000 if you did not give any in the previous year). You can also give away gifts of £250 per recipient each year (in addition to the £3,000 lump sums). Gifts from ‘surplus income’ rather than capital are also not ‘added back’ to your estate.

The third tip is similar to the second. If you give a gift to someone who is getting married or entering a civil partnership, then the gift will not be included in your estate for tax purposes. A parent can give £5,000 to their child when they get married/enter a civil partnership, a grandparent can give £2,500, and anyone else can give £1,000.

More tips in Part 2.


To find out more about tax and estate planning, click here.