How To Avoid Inheritance Tax With Little Effort

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We’re all going to die one day but have you made arrangements for the day you throw off your mortal coil?

It’s been said many times before but there really are only two certainties in life: death and taxes. To add insult to the ultimate injury you’re even going to be taxed for having the audacity to die.

I’m not trying to make death sound like a joke but you do need to consider this fact: up to 10 million homes are liable for inheritance tax. With this in mind, I decided to put together some useful information to help ease the burden on your family.


What is inheritance tax?

Is inheritance tax fair?

Is there a tax free threshold?

How to avoid inheritance tax

Getting married to avoid IHT

Give your money away

What is a gift?

Where can I get IHT advice ?

What is inheritance tax?

As you go through life you build up what’s called an estate. This consists of all the money you have in the bank, your home, investsments and any business you may own. Not surprisingly, it’s all liable for tax. Currently, your family will pay tax of 36% for an estate that breaches the Inheritance Tax threshold (as long you leave at least 10 % to charity. If not, the liability rises to 40%.

Sadly, many families don’t deal with matters very effectively and end up paying thousands more than they need to. I understand that it can be a sensitive subject even to the point that some memebrs of your family may be embarassed to bring up the subject.

If you want to make sure your relatives get the most from your estate, Inheritance Tax needs to be firmly dealt with.

Is inheritance tax fair?

Probably not. We spend our whole lives paying tax only to be taxed again when we die. The basic idea behind tax is to prevent the children of the rich staying rich. IHT helps to channel some of the money back into the state’s financial system. From there is can be redistributed to help other, more needy people.

If you leave your family a reasonably sized estate and minmise your liabilities you stand a good chance of leaving them a tidy sum in your will.

Is there a tax free threshold?

Yes. Regardless of who you are, you can leave a certain amount in your will without having to pay any tax on it. Called the ‘nil rate’, the current figure is £325,000. Once you go over this threshold anything you leave behind is subject to 40% tax (or 36% if you donate 10% of your estate to charity).

The ‘nil-rate’ is currently fixed until 2014. If you look at it in real terms, this means that, with inflation, you’re actually going to pay less tax.

Example: your estate is worth £400,000 but you pay nothing on the first £325,000. That leaves ou £75,000 which is liable for tax at 40%. If you don’t donate 10% to charity, you inheritors will have to pay £30,000 to the Treasury.

How to avoid inheritance tax

Fortunately, there are quite a few ways you can reduce the amount that’s paid out. In fact, one really move will save a huge amount of money. What’s the sceret?

Getting Married

If you’re married when you die and you leave your assets to your spouse or civil partner then ther’s no tax to pay. As long as they’re living in the UK. As an added bonus (to your partner), their IHT allowance rises by the amount you didn’t leave to anyone else. This means that, currently, a couple can leave up to £650,000 tax free.

Confused? Ok, here’s an example of how it works:

Bob and his wife, Louise, have assets of £900,000 when Bob dies. He leaves £300,000 to his children. The remaining £25,000 of his ‘nil-rate’ is automatically transferred to his wife. This means his wife now has a ‘nil-rate’ allowance of £350,000.

When Louise dies she has an estate worth £600,000. Because Bob’s nil-rate was carried over to her, she is now liable for 40% on £250,000. This means her family will have to pay the tax man £100,000 leaving £500,000 to be shared out amongst the family members.

The ‘nil-rate’ is a fairly new ruling. Prior to 2007, joint assets were liable for tax. This resulted in many people giving away tax free sums as gifts in order to avoid the liability.

If your partner died before the government changed the law you don’t need to do anything. The new rules have been backdated indefinitely.

What else can you do to reduce IHT?

Give your money away

This one is a little tricky. You can give money away but if you die within 7 years of handing out this gift then it’s still classed as part of your estate. This means it could still be liable for tax. Now, to be fair, the tax man would have to track down the money but that’s another story.

If you give away a large sum of money it is possible for the recipients to take out an insurance policy against IHT. If you’re intending to do this you’ll need to see expert advice.

Points to note:

The first £3,000 you give away each year will not be classed as part of your estate nor will it be taxed. This amount can be carried over into the next tax if unused.

Donating your money to your preferred political party or charity is also exempt from tax.

Giving £250 a year to friends and family. You can give anyone you want up to £250 per year, tax free. The rule applies on a per person basis which means that if you have 7 grandchlidren you can gift each of the £250 per year.

Dowery or consideration of marriage. Although it seems antiquated, the dowery is still in use and, more importantly, it’s tax free – up to a point. If you’re a parent you are allowed to hand over £5,000, £2,500 if it’s your grandchildren getting married and £1,000 for the rest of us.

Do run a farm, own woodland or run a heritage site as a business? Working farms with agricultural property could be exempt from tax. If you own woodland, the trees, but not the land, is exmpet.

What is a gift

The Oxford dictionary defines it as, ‘unconditional’. For the purposes of the law and taxation rules, you should not gain from gifting money. For example, you gift ‘some guy’ £3,000 and he repairs your roof. That’s tax avoidance on a Jimmy Carr scale.

Where can I get IHT advice?

Your first point of contact should be the IHT section of the HMRC website.
The information is fairly straightforward but, if you’re in any doubt, you may need to seek help. A financial advisor will be able to help you.

Likewise, if you have a large estate then it’s worth paying a few hundred pounds to let someone else deal with all the paper work.

One final note: make a will! Whilst your aim is to enjoy your old and the money you’ve earned you don’t don’t want family bickering over your estate.

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