Ways to Reduce Inheritance Tax in the UK

Many people in the UK seek ways to reduce inheritance tax. There are a few perfectly legal routes you can take to boost the portion of your inheritance that you get to keep. Tax reduction avenues often go unused because people aren’t aware of how they work, so let’s shed some light on some of the ways you can reduce your inheritance tax. 

What is inheritance tax?

When someone dies, the government levies a tax on their property, possessions, and money at set thresholds of value if any of it is to be inherited. For the most part, if everything is left to a spouse or civil partner, or a charity or community the amount of inheritance tax paid can be reduced.

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Inheritance tax has two thresholds for liability. Inheritance tax only applies over a certain threshold. If the valuation of an estate (the sum of their money, property, and possessions) comes to below £325,000, the heir won’t be liable to inheritance tax, as long as the value of the estate is reported. This is known as the nil rate band. For giving away a property to step, foster, adopted, or direct children, the threshold can be bumped up to £500,000.

Whenever an estate exceeds these thresholds, a 40 percent taxation comes into play. This is on the value that exceeds the threshold. For example, a £400,000 estate due to be inherited by someone’s children would see £75,000 of that subject to 40 percent tax (i.e., £30,000).

Ways to reduce inheritance tax

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Many estates aren’t simply passed over to one person. People often leave a divide of their assets in their will to give away.In this case, one way to reduce liability to inheritance taxon particularly valuable assets, such as shares, is to transfer shares as a gift to your spouse or civil partner. The government won’t apply Capital Gains Tax on shares if they’re gifted(only later when they are sold), so you could invest in shares, gift them, and reduce some liability to inheritance tax by way of doing so. 

You may also want to consider making the most of the reduced inheritance tax rate that comes with giving a certain percentage of the estate to charity. If you leave 10 percent of the net estate to charity, the 40 percent tax rate an estate is liable to is reduced to 36 percent. In addition, the amount of tax owed is calculated based on what is left of the estate after some of it has been donated to charity.

Another great way to reduce inheritance tax liability is through a “whole-of-life” insurance policy. This type of policy enables someone to plan in advance to cover an inheritance tax bill so that heirs to their estate don’t need to foot the bill themselves. It’s a proactive way to make inheritance tax easier on heirs. 

There are always ways to reduce the amount of inheritance tax you owe, as long as estate holders are smart and plan in advance, and heirs are informed about the methods they can use. The key is to remain educated on the topic.           

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