Top 5 ways to cut your Inheritance Tax

Money Advice Service

If you think your estate might have to pay Inheritance Tax, here are five simple things you can do to reduce the taxman’s cut – and not all of them involve changing your will.

Make a gift to your partner

You can beat Inheritance Tax by giving away assets, setting up a trust or changing your will. Make sure you pay attention to the legal details and tax consequences.

If you’re married or in a civil partnership, you can give anything you own to your spouse or civil partner (unless your spouse was born outside the UK, in which case the amount you can give away might be limited), so your estate won’t have to pay Inheritance Tax on what the gift’s worth.

There are different rules if your spouse or civil partner’s permanent home is outside the UK.

The rules are very complicated so make sure you take advice before doing anything.

Give to family members or friends

If you give something to a friend or a family member who is not your spouse or civil partner, so that you no longer get any benefit from it, the value of the gift will still be included in your estate for Inheritance Tax – but only for seven years.

So, for example, if you give one of your children some money, and you live for a further seven years, it won’t be taken into account when calculating the Inheritance Tax liability when you die.

You can give away limited amounts every year and not have to pay Inheritance Tax.

For example, you can give away up to £3,000 a year and you can give away money to your children and grandchildren when they get married.

Just be aware that there might also be Capital Gains Tax to pay on certain assets that you give away in your lifetime.

Check with a lawyer or accountant if you are unsure.

Put things into a trust

If you put some of your cash, property or investments into a trust (which you, your spouse and none of your children under 18 years can benefit from), they’re no longer part of your estate for Inheritance Tax purposes.

For example, you could set up a trust for your adult children, to pay for your grandchildren’s education, or support a family member with a disability.

You can set up a trust right away or you can establish one in your will.

There might be Capital Gains Tax consequences if you transfer certain assets into a trust in your lifetime, but there will be no liability to Capital Gains Tax if you establish a trust in your will.

Bear in mind that some types of trusts are subject to their own tax regimes and the trust might have to pay Inheritance Tax themselves.

Also, trustees are likely to be liable for Income Tax at a rate of 45% and capital gains tax at 28%.

The rules around trusts are complicated so you must take advice from an expert.

Leave something to charity

Anything you leave to charity is free of Inheritance Tax so it can be a useful way of reducing your Inheritance Tax bill, while benefiting a good cause.

And if you leave at least 10% of your estate to charity, it will cut how much Inheritance Tax is due on the rest.

The rate at which Inheritance Tax is calculated is 36% rather than 40%.

This rate is set against the balance of the estate to the extent that it exceeds the available nil-rate band (currently £325,000, although it can be reduced or eliminated by certain gifts made in a person’s lifetime).

This might not be a huge saving, but it can mean that family and friends will receive more than they would do otherwise – while your favourite charities also benefit.

Take out some life insurance

If you take out a life insurance policy, it won’t reduce the amount of Inheritance Tax due on your estate.

But the payout might make it easier for your surviving family to pay the bill.

It could mean that they are able to prevent the family home from being sold.

But if you do this, make sure the life insurance payout goes into trust – if you don’t it will make your estate bigger and it will have to pay more tax.

Learn more information on Life insurance and Inheritance Tax

This article is provided by the Money Advice Service.

Links with an * by them are affiliate links which help Rest Less stay free to use as they can result in a payment or benefit to us. You can read more on how we make money here.

Get the latest ideas, advice and inspiration​

No spam. Just useful and interesting stuff, straight to your inbox. Covering finance, learning, jobs, volunteering, lifestyle and more.

By providing us your email address you agree to receive emails and communications from us and acknowledge that your personal data will be used in accordance with our Privacy Policy and Terms and Conditions. You can unsubscribe at any time by following the link in our emails.