The amount of revenue that the UK Government derives from Inheritance Tax is growing all the time with significantly more estates being liable to the Tax. If your estate is worth more than £325,000, your beneficiaries will be liable to pay a 40% taxation on the entire amount above that threshold.
As the Government becomes aware of the growing value of this tax, they are focusing more on removing options open to people to reduce this burden. Examples of this are the recent changes to trust legislation.
There are never the less a number of ways in which you can reduce the impact of IHT and it is worth trying to take advantage of as many of them as you can, to ensure you pass on as much of your estate as possible.
Small Tax Relief Measures
Gifting it away
One of the easiest ways to start minimising your tax burden is by giving away gifts to your loved ones during your lifetime. There are a number of gifts that you can make without incurring a tax liability. You are able to make as many small gifts of less than £250 as you like and in addition you can gift a further £3,000 per annum. You can also make unlimited gifts to certain organisations such as charities or political parties.
If you make larger gifts these may either be a chargeable life time transfer if the gift is to a discretionary trust or a potentially exempt transfer (PET). If the gift is a PET then there will be no tax liability providing you survive for at least 7 years from the date of the gift, however, if you die within 7 years, initially the gift will reduce your nil rate band. If the gifts in aggregate exceeded the Nil Rate Band, the excess may be subject to taper relief.
Taper relief has the effect of reduce the amount of tax payable if you die between 3 and 7 years after the gift is given. If you pass away 7 years or longer after the gift was given, the recipient and your estate do not pay IHT on the gift. Any gifts made within 3 years of your death will be subject to a 100% tax liability; however this taxable amount reduces from year 4 to year 7,translating to between 80% and 20% tax liability. Furthermore, any gifts of any value given to your spouse or civil partner are not subject to IHT.
There are other gifting allowances which include wedding gifts to your children, grandchildren or anyone else of £5,000, £2,500, and £1,000 without paying IHT. You can also give £250 to as many individuals as you want in a year without paying IHT, as long as those individuals do not fall within another exemption.