Nobody wants to pay more tax than they have to, and when it comes to inheritance tax, there are several legitimate and straightforward ways to reduce what your estate might owe. The key is planning ahead, because most of the most effective strategies take time to work.
Here are some of the main options worth knowing about.
Make use of Your Annual gift Allowance
Each tax year, you can give away up to £3,000 free of inheritance tax. This is known as the annual exemption. If you didn’t use last year’s allowance, you can carry it forward for one year, meaning a couple could give away up to £12,000 in a single year using two years’ worth of allowances.
On top of this, you can make any number of small gifts of up to £250 per person per year to as many different people as you like.
The Seven Year Rule
Larger gifts can also fall outside your estate for inheritance tax purposes, but only if you survive for seven years after making them. These are known as potentially exempt transfers. If you die within seven years, the gift may still be subject to inheritance tax, though the amount charged may be reduced if you survive more than three years. This is known as taper relief and applies on a sliding scale. It’s important to understand that it reduces the tax charge, not the value of the gift brought back into the estate.
This is why starting early matters, the sooner you begin making gifts, the sooner the seven year clock starts.
Pensions and Inheritance Tax
Pensions currently sit outside your estate for inheritance tax purposes in most cases, making them one of the most tax-efficient ways to pass wealth to the next generation.
However, it is important to note that from 6th April 2027, unused pension funds are to be brought within the scope of inheritance tax as part of proposed legislative changes. This is an area where taking current, up-to-date advice is particularly important, as the rules may differ significantly from information published before that date.
Trusts
Trusts can be an effective way of removing assets from your estate while retaining some control over how they’re used. They can be complex to set up and administer, and the tax treatment depends on the type of trust and individual circumstances, but for the right situation they can be very powerful.
The Most important step
Understanding the options is one thing. Knowing which ones are right for your specific circumstances is another. A well-structured estate plan looks at your whole picture; your assets, your wishes, your family situation, and identifies the most appropriate steps for you.
If you’d like to explore what inheritance tax planning could mean for your estate, take a look at our Estate Planning page or get in touch to start a conversation.
