How To Minimise Inheritance Tax

Worried about paying too much inheritance tax? We can help – read today’s tax tip to find out how to minimise your inheritance tax bill.

How To Minimise Inheritance Tax

(4-minute read)

We will cover:

  • A few ways to lower inheritance tax
  • Why you should seek expert advice

An unwelcome tax

Inheritance Tax (IHT) is still as unpopular as ever.

In the UK, 1 in 25 deaths results in an IHT liability.

For the 2021-22 tax year, the government collected £6.1bn in inheritance tax bills, a 14% increase from the year before.

The figure for this year already looks set to breach that, and the Office for Budget Responsibility thinks the bill could reach £8.3bn by 2026.

The tax is payable when assets exceed the value of £325,000, at the rate of 40%.

Last November, chancellor Jeremy Hunt announced that the IHT nil-rate bands will remain frozen until 2028.

It has remained the same since 2009, and following the latest freeze, 10,000 more families could be dragged over the threshold.

However, with careful planning, there are ways to drastically minimise your inheritance tax bill and save more for your family.

How To Reduce Inheritance Tax UK – 6 Tips

1. Make a Will

First things first – make a will.

Without one, your estate will be divided according to a set of pre-determined rules, which could mean more money to HMRC than your loved ones.

2. Gifting Assets

The easiest way to pass your assets on to a loved one whilst minimising your tax bill is by gifting them.

But there are some things to consider.

Make sure you know the limits: you can gift up to £3,000 tax-free a year.

Gifts of £5,000 to children and £2,500 to grandchildren made in advance of a wedding are also exempt.

But anything over these allowances will be taxed if you die within seven years of making the gift.

3. Pension Pot

Another way to minimise your inheritance tax bill is by putting assets into your pension.

You can nominate beneficiaries should you pass away before you receive it.

The nominations must be submitted directly to your pension provider, and generally IHT isn’t payable.

However, if you die after the age of 75 your beneficiaries will need to pay income tax on the money they take out of the pension.

4. Hold AIM shares for two years

Investing in the London Stock Exchange’s AIM (previously the ‘Alternative Investment Market’) comes with IHT benefits.

You can minimise your inheritance tax liability through BPR (Business Property Relief) if you invest in AIM shares.

BPR is an important tax relief for shareholders of family companies because the shares will be covered by BPR on death.

This allows multi-generational family businesses to minimise their tax bill, including inheritance tax.

However, not all AIM shares qualify, and you must hold the shares for at least two years to be exempt from IHT. 

To avoid any headaches, speak to a financial adviser such as a Tax Expert.

5. Set up a trust

Setting up a trust to hold your assets is another option to consider.

You can transfer assets with a value up to £325,000 into a discretionary trust potentially without paying IHT.

The reason for this is that when assets are transferred into a trust, they are no longer part of your estate.

This might be a useful option when you believe your beneficiaries (e.g., your children) are still too young to look after your assets.

You could also buy an insurance policy that covers IHT liability.

This should be written in trust, and you should seek help from a financial adviser to do so.

Writing your life insurance policy in trust means the pay-out will go directly to your beneficiaries, rather than forming part of your legal estate, which could mean no IHT will be due.

6. Donating to charities

Finally, you could donate to charity, as well as museums and political parties.

If you give at least 10% of your estate to charity you could get a discount on your IHT rate for the rest of your estate, lowering it from 40% to 36%.

It may be worth speaking to a financial planner for some of these ideas because they depend on your specific case and must be followed carefully.

By speaking to us, you can significantly reduce your inheritance tax bill. Find out how by getting in touch with our team.

Contact us today at 01772 788200 to find out more about how we can help, or WhatsApp us out-of-hours at 07787 010190.

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Kind regards Ilyas