One of the best descriptions of inheritance tax (IHT) was written by British politician Roy Jenkins:
“It is a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue…”
Assuming you don’t distrust your heirs more than you dislike the taxman, here are 7 clever ways to save your estate being eroded by IHT: -
1. Spouse and civil partner exemptions
If your partner is not UK-domiciled however, limits can apply, and you should seek advice.
By transferring everything on first death to the surviving partner you won’t entirely remove your estate’s vulnerability to IHT.
The IHT liability will arise when the second partner dies…
So, it may be effective to pass some of your estate to your children and grandchildren - up to the Nil Rate Band, or by using a trust - rather than simply transferring everything to the surviving spouse.
2. Annual exemption
Every person is allowed to make an IHT-free gift of up to £3,000 in any tax year – and this allowance can be carried forward one year if you don’t use up all your allowance.
This means you and your partner could gift your children or grandchildren £6,000 this year, (or £12,000 if your previous year’s allowances weren’t used up), and that gift won’t incur IHT.
You can continue to make this gift annually.
3. Small gift exemption
You are able to make small gifts of up to £250 per year to anyone you like.
There is no limit to the number of recipients in one tax year, and these small gifts will also be IHT-free, provided you have made no other gifts to that person during the tax year
4. Lifetime gifts exemption
Lifetime gifts are those made by you while you’re still alive.
If such gifts are made to help with another person’s living costs, e.g. an elderly relative or child, they are free from IHT.
Other lifetime gifts may be exempt as long as you make them regularly (e.g., annually), and they come from your regular income, (such as pensions, dividends, interest from investments etc.), without affecting your lifestyle.
There’s an important caveat however!
Determining whether such a gift is exempt only happens after your death, and is subjective…
There’s a risk some gifts may be classed as being within your estate for IHT purposes if the taxman decides they did affect your lifestyle for example; therefore, if you are making habitual gifts it is important to document your intentions and keep a record of this with your will.
5. Marriage or civil partnership gifts exemption
If someone you know is getting married or entering into a civil partnership, you can give them a financial gift IHT free.
The amount you can gift depends on your relationship to the recipient: -
6. IHT-free bequests
Gifts or bequests to charities, political parties, universities and for national purpose or public benefit are IHT exempt.
7. Business owner exemptions
If you’re a business owner, you may be eligible for certain tax reliefs, depending on the type of business you own.
Often, a transfer made during life or on death will be completely IHT free.
The main tax reliefs, which are subject to minimum periods of ownership, are as follows: -
These are just 7 of the easiest and commonest ways you can use clever financial planning cut your IHT bill down to size.
Depending on your personal circumstances, you may be able to use a trust or trusts, wrapping assets and investments like an offshore investment bond inside, and further reduce your estate’s future liability.
For a no obligation discussion of your own personal options, do get in touch.
And, here are 3 more useful resources for you, if you’re interested in gathering more information: -
Editor's note: first published in 2018 - updated March 2019.