Ways to avoid inheritance tax (IHT)

If you wish for your children to inherit your estate when you pass away, it's important to consider the impact of inheritance tax (IHT) which could potentially reduce the amount they receive. In the fiscal year 2021/22, a historic sum of £6.05 billion was paid in inheritance tax to HMRC, surpassing the previous record of £5.36 billion paid in 2018/19.

This article looks at 10 strategies to safeguard your assets from taxation, ensuring that your children benefit from your estate before the tax authorities, and encourages inheritance tax planning.

1. Make a will Creating a will is a crucial aspect of estate planning, enabling you to ensure that your assets are distributed according to your preferences. In the absence of a will, assets will be distributed based on intestacy laws, potentially incurring inheritance tax (IHT) that could be prevented. It is essential to draft a will if you are concerned about the beneficiaries of your assets and wish to minimize your IHT obligations. Remember, assets passed between spouses are not subject to inheritance tax. 2. Make sure you keep below the inheritance tax threshold In the tax year 2022/23 the inheritance tax nil-rate band, also known as the inheritance tax threshold, for individuals is £325,000 and it will remain at this level until 2026. This nil-rate IHT band is transferable to a spouse or civil partner on death resulting in a total nil-rate band of £650,000 for couples. In the 2015 Summer Budget a new ‘main residence transferable allowance' was announced which gradually increased from £100,000 in 2017 to £175,000 per person by 2020/21 which may allow people to avoid inheritance tax on property. So, for 2022/23, the main residence transferable allowance is £175,000. This sum is in addition to the nil-rate IHT threshold. It means that a married couple or those in a civil partnership could potentially pass on up to £1million free of IHT. 3. Give your assets away When assets are given away and the giver lives for a minimum of 7 years, all gifts are exempt from inheritance tax. In the event of passing away within 7 years, inheritance tax will be applicable on a decreasing scale. Additionally, it is possible to provide gifts up to £3,000 annually without incurring IHT. Moreover, a gift of £5,000 can be given on a child's wedding day. 4. Put assets into a trust By placing assets in a trust, you can ensure that they are not included in your estate upon your death, thereby avoiding inheritance tax. For instance, you may choose to transfer assets into a trust for your children's benefit once they reach the age of 18. 5. Put assets into a trust and still get the income If you place assets into an ‘interest in possession trust' you can still take income from the assets (which is liable to income tax) whilst avoiding inheritance tax on death. 6. Take out life insurance You can cover any potential liability for IHT by taking out a life insurance policy for the potential inheritance tax bill and placing the policy in a trust to ensure it is paid outside of your estate. 7. Make gifts out of excess income You can make ‘gifts out of income' free from IHT. For gifts to qualify they must form part of normal expenditure, be made out of income and not reduce your standard of living. 8. Give away assets that are free from Capital Gains Tax If you have assets that have fallen in value since purchase (property, shares etc.) they could be passed on without attracting Capital Gains Tax (CGT). Any recovery in the value of any assets would accrue in the estate of the recipient and any gain would be free from a potential IHT liability after 7 years. 9. Leave something to charity Anything left to a charity will be free of any IHT liability. If you leave at least 10% of your total assets to charity then the inheritance tax rate on the remaining assets will be reduced from 40% to 36%. 10. Spend it! There is little point in living on a tight budget as you grow older and then your beneficiaries get taxed at 40% on some of your assets. If you have worked hard to build up your assets then you should enjoy them to their utmost, maybe a new car or a holiday of a lifetime will add a bit of a spring to your step in retirement.

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If all of your wealth is tied up in property, you could consider an equity release scheme such as a lifetime mortgage or home revision scheme. Depending on which option you choose, you will either borrow money against the value of your home or sell part of your home at a reduced market rate while continuing to live in the property.

The process works by reducing the assets you own and in turn increases the debts that count against your estate. The money you receive can be passed onto your future beneficiaries or, of course, you can spend it yourself. As explained in tip number 3 above, you'll need to survive the gift by 7 years to ensure there is no inheritance tax to pay.