Planning for inheritance tax

If your estate is likely to be well below the threshold for paying inheritance tax, there is no need to worry about it. But if it looks as if you are above it, there is much you can do to reduce the tax bill. An important first step is to draw up a will. This will make you think about what you own and how you want it to be disposed of after you die.

Many of the ways of minimising inheritance tax involve making gifts which are free of tax or making potentially taxable gifts more than seven years before your death. But remember your heirs will still gain from what you leave them even if tax is due on your estate. Don’t give away so much that you or your spouse are left impoverished in old age, merely to starve the Revenue of every last penny of tax.

Tax-saving ideas:

Draw up a will. There are simple steps you can take to minimise the tax payable on your estate when you die and to reduce the complications for those you leave behind.

Make as full use as possible of the lifetime gifts you can make which do not fall into the inheritance tax net, such as those which count as normal expenditure from income or fall within the £3,000 annual allowance.

Share your wealth with your spouse or civil partner so that you can each make tax-free lifetime gifts and efficient wills. There is no inheritance tax or capital gains tax on gifts between spouses or civil partners.

Tax-free gifts and PETs:

If you do have some resources to spare, make as full use as possible of the annual £3,000 exemption, regular gifts out of income and such like. And make sure your spouse has enough to make similar gifts tax-free.

If you want to make larger gifts, the earlier you make them the better – because inheritance tax may have to be paid on a gift if you die within seven years of making it. For this reason, most lifetime gifts are called potentially exempt transfers (PETs). They are potentially free of inheritance tax but you must survive for seven years after they are made for the tax to be avoided.

Even if you die within seven years of making the gift, there will be no inheritance tax if the gift is fully covered by your nil-rate band. If tax is payable, it will be reduced by taper relief if the gift was made more than three years before your death. Tax is initially due from the person to whom you made the gift but, if they can’t or won’t pay, your estate has to pick up the bill.

Note that gifts in your lifetime, other than cash, may mean a capital gains tax bill.