What’s Inheritance Tax & How Can You Cut The Amount You Pay?

Personal finance news is often dominated by solutions to day-to-day problems and debates about short term loans. But it’s important to consider long-term issues too.

Many people ignore Inheritance Tax because they don’t like to think about it. But failure to act early could mean your loved ones end up paying hundreds of thousands in tax after you leave them.

You have spent your life building up your legacy, so take steps now to protect it.

What is Inheritance Tax?

Simply put, Inheritance Tax is the UK government’s levy on your estate (money, possessions and property) after you die. Many people don’t qualify to pay it, but if you do, the standard rate is 40%.

How to pay less Inheritance Tax

Luckily, there are things you can do to ensure that more of your estate goes to the people you want to inherit it.

  1. Stay below the nil-rate band
    You don’t have to pay Inheritance Tax if the value of your estate is under £325,000 or you leave everything to your spouse/civil partner, a charity or a community amateur sports club. If you’re married or in a civil partnership, any remaining threshold is added to your partner’s.
  2. Give assets to friends and family
    You can give away £3,000 in gifts each year before Inheritance Tax is applied. On top of the £3,000, you can also give wedding gifts of up to £1,000 per person (or £5,000 if it’s your children and £2,500 if it’s your grandchildren)

If you give your home away to your children or grandchildren, your threshold increases to £425,000. Be careful – if you give away more than £325,000 in the 7 years before your death, it may be taxable.

  1. Make a gift to a partner
    As long as they’re a permanent UK resident, you can give your spouse or civil partner as much as you like throughout your lifetime without Inheritance Tax.
  2. Invest in businesses
    You can get a relief of 50% or 100% on some business assets if you pass them on either while you’re alive or as part of your will. The rules are complex, so look into them before you make any moves.
  3. Let someone else be your landlord

There’s no Inheritance Tax to pay on a home if you give it away and live for another 7 years. You can even carry on living there, but be careful – you’ll have to pay rent to the new owner and pay your share of the bills, so make sure it’s someone you trust.

  1. Leave money to charity or a political party

If your will grants 10% or more of your estate to a charity, Inheritance Tax is reduced to 36% on some assets. It’s a savvy way to help the world.

  1. Spend it!

While we all want to leave something to those we love, you only live once! Take some time for yourself and enjoy that Caribbean cruise you’ve always dreamed of.