Home / The Rix & Kay Blog / Common ways to reduce Inheritance Tax liabilities
Helen Cottington

Solicitor - East Sussex (Uckfield)

Whilst most people are aware of the notion of inheritance tax, it is surprising that so many people take little or no action to reduce their inheritance tax liabilities. This blog explains the basic rules around inheritance tax and what steps individuals can take to reduce their inheritance tax liabilities.

What is inheritance tax?

Inheritance tax is a tax levied on a person’s estate when they pass away. Before you consider ways to reduce your inheritance tax liabilities, it’s useful to understand that not all estates have to pay inheritance tax.

What are inheritance tax exemptions?

If the total value of your assets (i.e. property, money, possessions and any business assets) is below £325,000, there is normally no inheritance tax to pay.  In addition, if you own your home and it passes to your children, grandchildren or remoter direct descendants when you pass away (either in your Will or under the rules of intestacy), your estate could qualify for an additional tax free allowance of £175,000, increasing the tax free threshold of your estate to £500,000.

There are also a number of exemptions that could mean your estate has no inheritance tax to pay, even if the value of your assets is above the tax free thresholds. The two most common exemptions are if your entire estate is left to your spouse or civil partner or if you leave everything to charity or a qualifying amateur sports club. In these circumstances, no inheritance tax is due.

It’s also worth noting that if the deceased estate does not use up all the tax free allowance, then the remaining allowance can be transferred to the surviving spouse or civil partner.

How much will I have to pay?

Once all reliefs, exemptions and allowances have been applied to the value of your estate, the excess will be charged inheritance tax at 40%.

How can I reduce my inheritance tax liabilities?

In simple terms, the easiest way to reduce your inheritance tax liabilities is to reduce the value of your estate so that it is nearer to or below the tax free fresh-hold. There are a number of ways you can do this before you pass away:

  • You can make tax free cash gifts up to £3,000 each tax year
  • You can make money or asset gifts of any value tax free as long as you survive for 7 years after making the gift
  • Gifts to charity are tax free
  • Gifts to your spouse/civil partner are tax free
  • Small gifts of £250 per person each tax year are tax free
  • Gifts for weddings/civil partnerships are tax free up to the maximum allowance (£5,000 to a child, £2,500 to a grandchild/greatgrandchild, £1,000 to anyone else)
  • Making regular payments out of your income to help with another person’s living costs that do not affect your standard of living

In addition, if you leave 10% of the net value of your estate to charity, the estate will pay the reduced inheritance tax rate of 36%.

Contact us

Our specialist Wills, Estate Planning and Trusts Team help guide business owners, individuals and their families on effective succession planning to maximise wealth preservation. If you would like more information or an informal chat about how we can help then please do not hesitate to contact a member of our team, or email Helen Cottington helencottington@rixandkay.co.uk, t: 01825 744428.