There were no changes to UK Inheritance Tax (IHT) in the recent Autumn Budget. But this doesn’t mean things won’t change in future.
You now have more time to plan and think about this tax, which is great because time is one of the best ways to minimise the impact it can have. I’m going to explain why that’s the case and how you can reduce your bill or avoid paying anything at all!
How IHT works
IHT is a tax on your estate (everything you own) when you die.
It’s sometimes referred to as a ‘death tax’ and it’s one of the most hated forms of tax in the UK. The standard rate of IHT is 40%, so it’s no token gesture.
Because of the morbid nature of this tax, many people choose to ignore it. However, this could be a costly mistake, not just for you, but for your whole family.
Ways to avoid and minimise IHT
It was a close call, but IHT did not increase in the Autumn Budget. So, there’s all the more reason to take control now before any future increases. Here’s how you can pay less IHT or, in some cases, none at all.
1. Make use of your nil-rate band
This is the most obvious tip, but you may not be aware of your nil-rate IHT allowance.
You will have your own threshold of £325,000. Anything below this threshold is not subject to IHT. There is also the option to pass on any unused amount in your threshold if you’re married or in a civil partnership.
2. Use the RNRB when passing down a house
The lack of changes in the Autumn Budget means there is still a resident nil-rate band (RNRB) you may be entitled to. This gives you up to an extra £175,000 where no tax is due if you’re passing down your main home.
If you pass your home to a husband, wife, or civil partner – they don’t pay IHT. You can also pass on any unused allowance to them. This means you can combine your threshold allowances to eventually pass the family home on to children or grandchildren.
So, a couple could pass down up to £1,000,000 of property and assets and pay zero tax.
3. Explore life insurance policies
Another option is using a life insurance policy to cover your IHT bill.
If the policy is written in trust, it will fall outside your estate for tax purposes. This way, when you die, the proceeds from the policy can be used to pay for the tax bill instead of pulling money out of your estate.
Organising this can be complex. So it’s always worth seeking financial advice to make sure this legal process is done properly.
4. Give gifts
Each year, you can give away gifts of up to £3,000. Doing this whilst you’re still alive will reduce the overall value of your estate and the result will be paying less tax because your estate will be smaller.
You can also give away small gifts and wedding gifts ranging from £250 to £5,000.
5. Find out about potentially exempt transfers
This is where the extra time from the lack of change in the Autumn Budget could really benefit you.
You can give gifts of any amount that will fall outside your estate as long as you don’t die within seven years of doing so.
Things get a little complicated if you die within that timeframe. This is because tax would apply using a tapering-level system, depending on the time of death.
6. Investigate pension options
Most people don’t know about this, so count yourself lucky!
Depending on the type of pension you have, you may be able to pass it on tax free. Sadly, this works out most simply if you die before the age of 75. Otherwise, your recipients may have to pay income tax on the money they take out.
This is a major benefit of saving into a self-invested personal pension (SIPP) over an ISA. This is because an ISA would count as part of your estate but a SIPP wouldn’t. A SIPP can also include other assets, like commercial property, which would normally count towards your estate.
7. Give to charity
When you hear about people donating loads to charity on their deathbed, it’s not completely selfless.
In the UK, if you donate 10% of your estate to charity when you die, you’ll actually get a reduced IHT rate of 36% on the rest of your assets!
Please note that tax treatment depends on your individual circumstances and may be subject to change in the future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
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About the author
George is a writer and qualified financial adviser focused on educating others in personal finance & investing.
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