How to Avoid Inheritance Tax

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This is a collaborative post.

Whether it’s unexpected or not, Inheritance Tax can be inconvenient, stressful, and expensive for your loved ones when they’re grieving. And if your estate is large enough, it’s likely that Inheritance Tax will be charged after you pass away.

When you’ve worked for everything that you own, it can feel frustrating to know that your family might be taxed on what you consider rightfully theirs. And with the government currently freezing thresholds on some estates due to soaring inflation, 50,000 more families will need to pay Inheritance Tax despite earlier reassurance.

While it might not be possible to eliminate the charges completely, a few proactive steps can help you to pass on as much as possible. We’ve outlined eight things you can do to reduce the income tax charged on your estate.

As you navigate the complexities of inheritance tax and estate planning, it’s also important to be prepared for the probate process. To ensure a smooth journey, you can follow these probate steps, which provide essential guidance on what to do before applying for probate.

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What is Inheritance Tax?

Inheritance Tax is a tax charged on the property, money, and material possessions of someone who’s died – collectively, these are known as an estate. Even if its value is below the threshold, you may still need to report the value of your estate.

Generally, you will only be exempt from paying Inheritance Tax if:

The total value of your estate falls below the threshold, which is £325,000
You leave everything above the threshold to your spouse, legal civil partner, a charity, or an amateur sports club in your community

You can’t avoid Inheritance Tax completely. However, with some prior planning and some organisation during your retirement, you can make sure that your loved ones receive as much of your estate as possible.

How can you avoid or reduce Inheritance Tax?

1. Spend your money now

One of the simplest ways to reduce Inheritance Tax payments is to either spend your money or give it away while you’re still alive. As long as you live for seven years after giving gifts, you won’t be charged any tax on them. You can give up to £3,000 worth of gifts each year.

2. Write a will

You can get your money to who you want, for reasons of your choosing, by writing a will. Completing the process early gives you more control over your assets, allows some flexibility, and helps you to legally protect your assets against Inheritance Tax. During the process, seeking estate-planning guidance could prove invaluable.

3. Gift money to charity

There are no limits on the amount of money you can donate to charities or political parties. And if you leave gifts equivalent to 10% of your estate to charity in your will, this could also reduce the Inheritance Tax rate to 36%.

4. Use your property allowances

There are various allowance types. In the 2023/24 tax year, the Inheritance Tax nil-rate band is £325,000. This means that no tax will be due on the first £325,000 of your estate, no matter who you pass it to. Many people transfer their own unused allowance to their surviving partner when they die, giving couples a joint nil-rate band of £650,000.

5. Take out life insurance

Lastly, you can insure against an Inheritance Tax bill. Comprehensive life insurance is one of the most reliable ways to cover against an unexpected bill, but these policies can be quite expensive unless you’re healthy and relatively young. As long as the policy is written into trust, the payout won’t become part of your estate.

Overview

Inheritance tax can be complex and avoiding the most significant charges takes long-term commitment. However, with professional support and long-term planning, you can make sure that your money goes where you want it to.

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