21 ways to reduce inheritance tax

21 ways to reduce inheritance tax

We will look at 21 ways in which you can reduce your Inheritance Tax bill and leave more of your assets in the hands of those closest to you after you are gone.

Introduction to inheritance tax

None of us will be here forever.

We all want to believe that when we are gone that we will leave those closest to us financially secure and able to enjoy as much of our estate as possible.

We want to ensure that they will.

Be able to use their share of our estate to lead a happier, more financially stable life.

While some of us might understand that it’s only fair that some of our estate be paid to the treasury via Inheritance Tax (IHT), the evidence suggests that we, as a country, are overpaying.

Every year the treasury rakes in billions due to rising property prices and frozen tax thresholds.

Not only that, often the assets subject to IHT have been bought out of earnings that have been taxed heavily already, so some might say this is a tax on receipts already taxed heavily.

This all amounts to a lot of capital being submitted to the government which could be put to better use by our loved ones.

While we are all happy to pay a fair share, we want to do all that we can to keep our estate in the family’s hands wherever possible.

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Discuss inheritance

None of us enjoys discussing matters central to our own mortality.

Nonetheless, a shocking 47% of UK adults have never discussed the matter of passing on their legacy.

This means that they have no idea of the options available to help mitigate tax liability for their beneficiaries.

Thus, the first and most important thing you can do is broach the subject with your family and a tax planning expert.

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Know your Nil-Rate Band

In the year to 5 April 2020 every UK citizen is entitled to pass on up to £325,000 of their assets without paying IHT. This is called the Nil Rate band.

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Double up with your partner

If you are married or in a civil partnership, you can share their threshold with your partner, transferring the unused element of your tax-free allowance to your living spouse after your death.

Doubling up the relief rate in this way means that married couples and registered civil partners share a joint nil-rate band of up to £650,000.

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Take advantage of the RNRB

At the start of the 2017 financial year, an extra allowance was introduced wherever a place of residence is passed to a ‘direct descendant’ like a son or daughter.

This is the Residence Nil-Rate Band (RNRB). Much like the standard nil-rate band, unused elements of this allowance are transferable to a surviving spouse or partner as long as you are in a registered civil partnership.

In the year to 5 April 2020, the RNRB threshold stands at £150,000, rising to £170,000 In the year to 5 April 2021.

This means that a married couple could theoretically pass on up to £950,000 tax-free to their direct descendants this financial year.  

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Make a will

You’re never too young and you’re never too old!

It goes without saying that if you care about what happens to your assets after you’re gone, the worst thing you can do is die intestate.

Making a will is the most important thing you can do in making sure that your wishes are carried out and that your estate goes where you want it to.

Remember that you’re never too young or too old to think about making a will.

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Keep your will up to date

There are near constant legislative changes made which can have far-reaching implications on your will.

Nonetheless, few of us update our wills after they have been made.

In order to ensure that your family benefit from new initiatives (like the RNRB) it’s essential that you keep abreast of new legislative changes and update your will accordingly.

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Give lots of little gifts

The problem with leaving your assets to your loved ones in your will is that you don’t get to see them enjoy them.

Fortunately, there’s much more to IHT management than making a will.

The treasury realises that many want to see their loved ones enjoy their assets while they are still alive which is why there are lots of tax-free giving options for those who want to see their loved ones benefit from their estate.

For example, up to £250 can be given to any number of people every year tax free.

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Or give one person a big gift

Every year you can also give away up to £3,000 and that gift will not be subjected to Inheritance Tax.

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Give someone you love a wedding gift

Wedding gifts are also a great way to share your estate with someone you love at an important time, just as they are building a life with someone they love.

Parents can give up to £5,000 IHT free to each of their children as a wedding gift, while grandparents can give up to  £2,500 IHT free.

You don’t even have to be directly related to the beneficiary.

You can give anyone else you like up to £1,000 as a wedding gift.

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Give to charity


What better legacy could you leave than by giving generously to a charity of your choice?

Gifts of any size are completely tax free.

Simply give safe in the knowledge that all of your donation gets to make a difference.

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Need tax help ?

Get in touch with Wagner Associates, specialists in personal and corporation tax.

Give to a political party

Is there a political party that represents all the ideals for which you stand?

There’s good news.

Tax free gifts to political parties are also unlimited.

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Take advantage of taper relief rates

If you still have years and years of life left in you, any additional gifts you give to your loved ones may be subject to tapered relief rates.

Potentially exempt gifts can be made if you survive for at least 7 years after they have been granted.

If you die within 0-3 years thereafter IHT will be paid at 40%. If you die within 3-4 years the rate drops to 32%, 24% after 4-5 years, 15% after 5-6 years and just 8% after 6-7 years.

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Use your pension to your advantage

Your pension is one of your most tax efficient tools when it comes to passing on your wealth to your loved ones.

If you die before reaching the age of 75, benefits can be left in a money purchase pension.

These can then be either paid out in a lump sum or as drawdown income to any beneficiary, without paying any IHT.

If you pass on after the age of 75 benefits will be taxed at the beneficiary’s marginal income rate.

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Supplement your pension with other savings

You may wish to supplement your pension with other savings such as ISAs.

This means that you are less reliant on your pension for income and retain funds in your pension pot for longer.

As long as they remain in drawdown they will also remain IHT-free!

This means that the pension pot can potentially keep cascading down to generation after generation.

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Think about how you own your home

Many UK couples own their homes as joint tenants.

This means that when one partner dies, the other becomes the sole owner of the property.

While this works for most, for some it may be beneficial to instead become tenants in common; each owning a set share of the home.

This allows you to pass on a share of your home to someone other than your spouse in the event of your death (such as a child).

This can go a long way to reducing IHT and care costs where long-term care is required.

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Trust in trusts

Trusts can be an extremely useful estate management tool, yet few of us are prepared to take the time to get to know them.

In simple terms, trusts can reduce your Inheritance Tax bill while also giving you greater autonomy over what happens to your estate when you pass on.

Trusts can allow you to;

  • Withhold your children / grandchildren’s inheritance until they reach a certain age (when they will have the maturity to use it wisely).
  • Keep a lump sum outside of your survivor’s estate to insulate it from IHT.
  • Protect your legacy if your spouse remarries.

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Leverage your life assurance

Don’t forget that your life assurance can be used to pay-off or reduce your potential Inheritance Tax Bill.

If you have setup a whole-of-life assurance policy, as long as it is written in trust, the proceeds of the life assurance policy are not included in your estate.

Thus, they can be used to offset your IHT.

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Use discounted gift trusts

If you currently have the capital to spare, discounted gift trusts could save you and your loved ones from a sizable IHT bill at a later date.

These trusts allow you to pay money into the trust, drawing income throughout your life and leaving the remainder behind for your beneficiaries IHT free.

Share your shares

If you have some of your capital invested in stocks and shares, there’s good news.

A lot of  shares listed on the Alternative Investment Market (AIM) become free from Inheritance Tax as long as you have held them for a minimum of two years.

This is because they qualify for Business Relief (BR).

While any investment in the stock market has an inherent element of risk, with the right advice this can be mitigated and could even allow your assets to flourish.

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Consider Enterprise Investment Schemes

While riskier than AIM trading, Enterprise Investment Schemes are also subject to Business Relief after 2 years and may be a worthwhile consideration for at least a portion of your estate.

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Call us about inheritance tax !

Perhaps the most meaningful way to reduce your IHT bill is to call us today.

Our expert and experienced team can help you with every aspect of estate management to help you to find the best solutions for you and your loved ones based upon your circumstances.

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