Please note that tax treatment depends on the specific circumstances of the individual and may be subject to change in the future.
Recent figures from HMRC suggest that Inheritance Tax in the UK is on the rise! The figures show that, during 2021, the tax body took £5.9 billion in Inheritance Tax. This is an increase of almost £600 million compared to the previous year. However, it is possible for Brits to avoid increasing rates and lower their tax bill. So, here’s how to reduce your Inheritance Tax.
How Inheritance Tax works
Put simply, Inheritance Tax is a tax paid when you receive money or property when a loved one dies. Inheritance Tax is different from the Estate Tax, which is a levy on the estate of a loved one who has died.
Furthermore, Inheritance Tax is paid on any money or property over the value of £325,000. Therefore, if your inheritance falls below this amount, you will not have to pay Inheritance Tax. However, you will still be required to report the inheritance to HMRC.
The standard Inheritance Tax rate is 40%, and it’s charged on any value above £325,000. This means that inheritance of £400,000 would only be taxed on £75,000.
Inheritance Tax is automatically paid by the executor of your will. The tax is funded by your estate, which means that those who inherit your money or property do not have to directly sort out the Inheritance Tax. However, they may have other taxes to sort out depending on the nature of your estate.
Why Inheritance Tax is on the rise
In 2021, an increase of £600 million was taken by HMRC in Inheritance Tax. The rate of Inheritance Tax has been on the rise for years due to the increasing consumer price index (CPI). Consequently, Inheritance Tax could go up even further in the future!
How to reduce your Inheritance Tax bill
No one likes the thought of the value of their will being slashed by 40% after they pass. Luckily, there are a number of ways that Inheritance Tax can be reduced.
Give early gifts
Inheritance Tax can be charged on gifts of over £325,000 if they are given more than seven years before your death. Therefore, it may be wise to give gifts early. Gifts that are given before the seven-year period will not be subject to Inheritance Tax. Consequently, this is a great option to consider if you have time to plan early.
Pass your estate on to your spouse or civil partner
If you’re married or in a civil partnership, you can leave your inheritance to your partner tax free! Furthermore, your partner’s Inheritance Tax allowance can be increased by the amount of Inheritance Tax that you don’t use.
Therefore, if you have a substantial estate, you may want to consider leaving the majority to your spouse. Additionally, your executor will ensure that the inheritance is not charged after you pass.
Give to charity or a community amateur sports club
If you want to help others whilst decreasing your Inheritance Tax bill, you could consider giving anything over the £325,000 threshold to your favourite charity or local sports club. Anything that is left to these organisations is free from Inheritance Tax! As a result, this could be a great option to consider if you do not have a spouse or civil partner.
Give your house to your children
Most of the time, the majority of a person’s estate is made up of property. Luckily, you are able to give your home to your children tax free before you die. Moreover, doing this could decrease the value of your estate below the tax threshold and prevent Inheritance Tax from being taken.
However, it is important to consider the practicalities of giving your house to your children. While doing so will avoid Inheritance Tax, your kids may have to pay additional taxes due to owning a second property. As well as this, you may have to pay rent to your children if you give them your home before you die. Consequently, it may be easier to give your home to your spouse or civil partner after you die so that you can continue to live in your home without any extra expenses.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, nor 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
Ruby is a freelance writer who enjoys writing about all things personal finance. After embarking on her own side hustle journey three years ago, Ruby is passionate about helping others to learn about the ins and outs of persona… Read More
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