A decade of soaring house prices means that we are paying more inheritance tax than ever but with astute financial planning, you can make sure that your family pays as little or no tax when the time comes.

Many people argue that it is unfair to pay taxes throughout your working life and then have to pay taxes again when you die. Whether it’s a view you share, it is an issue you can’t afford to ignore. We are paying more inheritance tax (IHT) than ever as the nation’s wealth grows fuelled by sky-high house prices. Last year, £6.1 billion worth of IHT receipts were paid into the HMRC coffers, an increase of £729 million from the previous year.

IHT is a 40 per cent tax imposed on the worldwide estate of anyone who is UK-domiciled on all assets above £325,000. If you make no plans to mitigate your IHT liability, the value of your estate above the threshold will be subject to IHT.

Looking on the bright side, all is not lost because IHT is dubbed a “voluntary” tax for good reason. There are several ways in which you can reduce or avoid your IHT liability with the HMRC’s blessing – and here’s 10 of them:

1. Make a will

Talking about death is a taboo subject for many of us, and so, it is perhaps no surprise that a significant number of people fail to make a will. But, like it or not, making a will is crucial for anyone wanting to protect their family from a huge headache after they die. Without a valid will, so-called intestacy rules apply, and not all of the estate will necessarily pass to the surviving spouse. Without a will, you risk depriving your spouse or partner of their home and increasing the IHT burden your family will have to pay.

2. Use a pension

Unlike your investments or cash savings, pensions do not form part of your taxable estate. Under current rules, up to £60,000 may be contributed to a personal pension annually, free of tax. If you die before the age of 75, whoever inherits your pension pot can draw on the money as they wish, without paying any income tax either. It is worth noting that the IHT treatment of some pension schemes can be complex, which is why it is important to ensure that your nomination of beneficiaries is completed and accurate.

3. Give it away

One of the simplest ways of avoiding IHT is to give as much as possible away while you’re still alive. You can give away up to £3,000 a year, which isn’t added to your estate for IHT purposes. You can also give away as many small gifts, worth up to £250, as you wish – although they cannot be a recipient of the annual £3,000 gift allowance. It is worth knowing that if you are a parent, you can give £5,000 to your children when they marry, while grandchildren or great-grandchildren can be gifted £2,500.

4. Don’t forget the seven-year rule

While certain gifts are always IHT-free, larger gifts are subject to the so-called “seven-year rule”. This means the recipients of the estate pay any IHT arising on the gift if the donor dies within seven years of making it. The amount the estate pays diminishes on a sliding scale, depending on when the donor died. There is an opportunity to make multiple uses of the lifetime nil rate ban because the clock is reset every seven years.

5. Use surplus income

If your taxable income is greater than your normal expenditure, you can make unlimited gifts out of that surplus income – and such gifts would be outside your IHT estate from day one. To qualify for this exemption there must be a pattern of giving over a period of time (which is why HMRC refers to it as referred to as ‘normal expenditure out of income’) and as such this type of gift is not appropriate as a ‘one off’.

6. IHT-efficient investments

Certain reliefs allow you to pass on some business and agricultural property free of inheritance tax, either during your lifetime or as part of your will. Investment portfolios investing in companies listed on the Alternative Investment Market (AIM) can also qualify for IHT relief – although this would be considered a higher-risk investment, so getting specialist advice is crucial.

7. Use your discretion

Discretionary trusts allow you to ring-fence assets for the future use of your beneficiaries – this won’t trigger an IHT charge so long as you are not a beneficiary of the trust in any way. Wealthy grandparents often use such a trust to help pay for their grandchildren’s school fees as they can put the amount of their available nil rate band (currently £325,000 per person, £650,000 for a couple) into the trust to reduce a potential IHT liability.

8. Insure yourself

A popular way to prepare for any IHT liability is to take out a whole-of-life assurance that provides a sum that can be used to pay the IHT bill after you die. The key here is that proceeds of the policy do not form part of your estate, provided it is held in a trust.

9. Give yourself a loan

You can mitigate your IHT liability but still have the reassurance that you can access your capital should you need it using a loan trust. In essence, you loan a sum of money to a trust, which is subsequently typically invested in an offshore bond. You can then withdraw up to 5% of the bond each year – and you can draw on the loan if you need the capital. Any excess capital growth generated by the bond, over and above the original loan amount, is not subject to IHT.

10. Be charitable

Gifting to charity can help reduce any of this tax in two ways. First, it can be taken off the value of your estate before IHT is calculated and second if charity gifts are worth at least 10% of the net estate at death a reduced amount of tax is payable.

To discuss any of the issues raised in this article, please contact your adviser, or call us directly on 0161 819 1131. Further information can also be found at gov.uk.

Personal circumstances differ and not all of this information is applicable to every client and/or their business, this information is general in nature and should not be relied upon without seeking specific professional financial advice.

The Financial Conduct Authority (FCA) does not regulate tax advice, estate planning, trusts or will writing.

The content in this article is for your general information and use only and is not intended to address your particular requirements. Articles should not be relied upon in their entirety and shall not be deemed to be, or constitute, advice.

Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough examination of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of any articles.

Thresholds, percentage rates and tax legislation may change in subsequent finance acts. Levels and bases of, and reliefs from, taxation are subject to change and their value depends on the individual circumstances of the investor. The value of your investments can go down as well as up and you may get back less than you invested. Past performance is not a reliable indicator of future results.

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