10 'clever' tips to avoid inheritance tax trap and pass on more to loved one (2024)

10 'clever' tips to avoid inheritance tax trap and pass on more to loved ones (Image: Getty)

HMRC collected over £7billion in inheritance tax last year, a figure rising year-on-year placing substantial financial strain on families who wish to pass on well-earned assets to the next generation.

In previous years, inheritance tax was typically only an issue for the very wealthy, however, soaring house prices and inflation rates have left more and more families falling into the thresholds and leaving less to loved ones.

In view of this, there are legal and legitimate ways people can reduce the impact of inheritance tax to ensure friends and family receive the “maximum benefit” of their estate, an expert has said.

Sam Robinson, principal financial adviser at Almond Financial, provides 10 tips to reduce - or even avoid - inheritance tax, depending on a person’s situation.

READ MORE: Inheritance tax shakedown as HMRC rakes in extra £273m and families overpay

Taking advantage of the gifting rules could “significantly” reduce a person’s inheritance tax bill (Image: Getty)

Aim to keep below the inheritance tax threshold

Inheritance tax (IHT) is the money paid to HMRC upon death, depending on the value of a person’s estate. An estate encompasses assets such as property, possessions and money, excluding pensions.

People are granted a tax-free threshold of £325,000, referred to as the Nil-Rate band, after which a 40 percent tax is applied on the remaining value of the estate. Mr Robinson said: “Rising property prices and the freeze on inheritance tax thresholds until 2028 mean more families are getting caught in the IHT net than would have if the bands rose with inflation.

“This makes it even more important for families to understand how they could plan to avoid the threshold and the eventuality of IHT.”

Write a will

According to Mr Robinson, writing a will is a “key part” of inheritance tax planning. He said: “If you die without a will, your assets will be shared out by legal default and may be subject to IHT that could otherwise have been avoided. If you express your wishes in a will, you can plan to allocate your estate in a way that will reduce IHT and maximise the benefit of your assets to those you are leaving them to.”

Gift money

Taking advantage of the rules around gifting could “significantly” reduce a person’s inheritance tax bill, as this enables them to transfer wealth outside of their taxable estate. According to Mr Robinson, gifted transfers exempt from a person’s estate and are therefore ignored by IHT, include:

The £250 small gift allowance - gift £250 to as many people as you want, as long as another gift allowance has not been used on the same person
The annual exemption - gift a total of £3,000 a year to either one person or split between several people
Gifting from normal income - all gifts from regular salary are exempt from IHT.

Mr Robinson said: “Tactical treats to loved ones in the form of any of these gifts could reduce your inheritance tax bill or even put you under the taxable threshold.”

Consider trust planning

Mr Robinson said: “Gifting into trust can be a clever way of removing assets from your estate for inheritance tax purposes.”

However, he noted that trust planning is a “complex and tricky” area and who people want to leave their assets to will impact the type of trust they use. From bare trusts to discretionary trusts, Express Money spoke to experts about the benefits here.

Practice philanthropy

Gifting or leaving money in a will for charities, political parties, the national purpose and housing associations will always be free from inheritance tax.

In addition, Mr Robinson said: “If you leave more than 10 percent of your taxable estate (10 percent of the excess over £325,000) to charity in your will, the inheritance tax rate for the rest of your estate will fall from 40 percent to 36 percent.”

Spoil a spouse

Mr Robsinson said: “There are significant benefits of being married or in a civil partnership when it comes to inheritance tax. If you are married, 100 percent of assets gifted between spouses are IHT-free and don't use any of your Nil-Rate bands.”

This means those who leave their entire estate to their spouse in their will won’t have any inheritance tax due.

Mr Robinson added: “If a spouse dies and their tax-free allowance of £325,000 has not been used up from gifts to others in their will, then their remaining tax-free allowance can be transferred to the surviving spouse; potentially doubling their allowance so they can pass on up to £650,000 tax-free when they die.”

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Wedding gifts

There’s a special exemption from IHT for cash gifts made on or shortly before the date of a wedding, known as ‘gifts in consideration of marriage’.

According to Mr Robinson, the tax relief on IHT depends on the relationship between the gifter and the giftee:

Each parent (including step-parents) can gift up to £5,000 tax-free
Grandparents and great-grandparents can gift up to £2,500
Any other person can gift up to £1,000.

Remember the seven-year rule

No tax is due on any gifts as long as the gifter lives seven years after gifting them unless the gift is part of a trust. This is known as the seven-year rule.

Mr Robinson said: “If you die within seven years of a gift’s time then IHT may be due, with the help of taper relief. Gifting is tricky to get right; gift too early and you could lose the asset and/or income and control, gift too late and you could pay 40 percent IHT due to the seven-year rule.”

Pass on a pension

Pensions usually fall outside of a person’s estate, so are exempt from IHT. Mr Robinson said: “You can spend the assets within your estate in retirement instead of your pension, allowing it to be passed on IHT-free unless you rely on the state pension, which cannot be inherited.”

Providing an example, Mr Robinson said: “Spending your assets could consist of downsizing or selling your house to rent, using the surplus as your retirement fund instead of your pension; Spend your house, save your pension.”

Plan ahead

Mr Robinson said: “Inheritance Tax planning is complex. If you’re planning on passing down your hard-earned assets to the next generation, you should seek help from a professional financial advisor who can help you pass down the maximum benefit of your estate.”

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