6 simple ways you can avoid UK inheritance tax
Assuming you don't distrust your heirs more than you dislike the taxman, here are 6 clever ways to save your estate being eroded by IHT:
1. Spouse and civil partner exemptions
Gifts and transfers between most married couples and civil partners living in the UK are IHT-free.
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: -
- £5,000 to a child.
- £2,500 to a grandchild or great-grandchild.
- £1,000 to any other person.
6. IHT-free bequests
Gifts or bequests to charities, political parties, universities and for national purpose or public benefit are IHT exempt.
With careful planning, it's possible to mitigate your IHT liability. We understand that estate planning can be challenging. The first step would be to get in touch with us: firstname.lastname@example.org and get advice tailored to your needs.