How to Avoid Inheritance Tax in the UK

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How to Avoid Inheritance Tax in the UK

Whether you have earned your wealth, inherited it or made shrewd investments, you will want to ensure that as little of it as possible ends up in the hands of HM Revenue & Customs. With careful planning and professional financial advice, you can learn how to avoid inheritance tax in the UK by taking preventative action to either reduce or mitigate a person’s beneficiaries’ Inheritance Tax bill – or even eliminate the need to pay inheritance tax altogether.

These are some of the main areas to consider:

1) Make a Will

A vital element of effective estate preservation is to make a Will.

According to a YouGov survey, almost 60% of all UK adults do not have a Will.

This is mainly due to apathy but also a result of the fact that many people feel uncomfortable talking about issues surrounding death. Making a Will ensures your assets, big and small are distributed in accordance with your wishes.

This is particularly important if you have a surviving spouse or registered civil partner. Even though there is no Inheritance Tax payable between married couples or married partners, there could be a potential inheritance bill if you die intestate without a Will.

Without a Will in place, your estate falls under the laws of intestacy – and this means the it may not be divided up in the way the you want it to be.  Please see separate article: Intestacy Rules – Dying Without A Will

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Avoid Inheritance Tax - Make a will

2) Make Allowable Inheritance Tax Gifts

Are you making the most of tax free gifts?

Inheritance Tax exemptions apply to certain gifts including:

Wedding Gifts
Parents can give cash or make gifts worth up to £5,000 when a child gets married, grandparents up to £2,500, and anyone else up to £1,000.

Cash Gifts
An individual can give cash or gifts worth up to £3,000 in total each tax year, and these will be exempt from Inheritance Tax when they die. (Please note, this is a total amount, not a per person figure).

You can carry forward any unused part of the £3,000 exemption to the following tax year. After this, if you don’t use it, it will be lost.

Inheritance Tax - Cash Gift

Small Gift Allowance
You can also make unlimited small gifts of up to £250 per tax year to as many people as you like, as long as you haven’t used another allowance on the same person.

Please also refer to the following related articles:
Understanding Inheritance Gifts
Tax Efficient Gifts For Christmas

3) Give Away Assets

Inheritance Tax - Assets

Parents are increasingly providing children with funds to help them buy their own home.

This can be done through a gift, and provided you (the parent) survive for seven years after making it, the money automatically moves outside of your estate for Inheritance Tax purposes, irrespective of size.

If you own your own home, one of the ways you can the release funds to make this gift, is through equity release. However, I strongly recommend you seek professional advice from an authorised and regulated individual before considering this option so you fully understand the pros and cons.

Please note: Captial Gains Tax may be payable on certain assets.

For more information about the seven year rule, please take a look at this article:

4) How to Avoid Inheritance Tax in the UK with a Trust

Assets can be put in an appropriate trust, thereby no longer forming part of the estate. There are many types of trust available that, if appropriate, usually involve parents (settlors) investing a sum of money.

The trust has to be set up with trustees – a suggested minimum of two – whose role is to ensure that on the death of the settlers, the investment is paid out according to the settlors’ wishes. In most cases, this will be to children or grandchildren.

The most widely used trust is a discretionary trust and can be set up in a way that the settlors (parents) still have access to income or parts of the capital. It can seem daunting to put money away in a trust, but they can be unwound in the event of a family crisis and monies returned to the settlors via the beneficiaries.

Please also see:
Types of Trusts – How TO Give Away Your Wealth and Keep Some Control

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5) The Normal Expenditure Out of Income Exemption Rule

As well as putting lump sums into an appropriate trust, people can also make monthly contributions into certain savings or insurance policies and put them into an appropriate trust.

The monthly contributions are potentially subject to Inheritance Tax, but if the person can prove that these payments are not compromising their standard of living, they are exempt.

Alternatively, people can give away their surplus income and is very flexible and simple strategy, without the need for a trust, using the normal expenditure out of income exemption rule

Estate Planning - Income

6) Provide for the Tax via Life Insurance in Trust Inheritance Tax

If a person is not in a position to take avoiding action, an alternative approach is to make provision for paying Inheritance Tax when it is due. The tax has to be paid within six months of death (interest is added after this time). Because probate must be granted before any money can be released from an estate, the executor may have to borrow money or use their own funds to pay the IHT bill.

This is where life assurance policies written in an appropriate trust come into their own.

A life assurance policy is taken out on both a husband’s and wife’s life, with the proceeds payable only on second death. The amount of cover should be equal to the expected Inheritance Tax liability. By putting the policy in an appropriate trust, it means it does not form part of the estate. The proceeds can then be used to pay any Inheritance Tax bill straightaway without the need for the executors to borrow.

Inheritance tax gifting rules and exemptions can be complex. If you would to learn more about avoiding inheritance tax in the UK, speak to experienced Cardiff-based Independent Financial Adviser Tony Thomas on 07585 592494, email: or book a call using the button below:

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2023-01-29T12:46:42+00:00Estate Planning|0 Comments

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