The Easiest Ways To Reduce Your Estate’s Likely Inheritance Tax Bill

Expenditure

There are many ways to potentially reduce the value of your estate, but the often overlooked and simplest method is increased expenditure on items that are not included in your estate. This can often be difficult for individuals who have always lived ‘within their means’, but it is the simplest and possibly the most enjoyable method of combatting this ‘problem’.

Gifts

Another area that can be explored is the option for gifts during your lifetime. Contrary to popular belief, there is no limit on how much can be given. Gifts to individuals are what is known as a potentially exempt transfer (PET). If the person gifting lives for seven years from the point of gift, the amount will not be included in their estate for inheritance tax purposes. If the person passes away within 7 years, and their total gifts exceed the nil rate band of £325,000, taper relief reduces the inheritance tax due.

There are further exemptions for gifts that are immediately excluded from an estate for inheritance tax purposes, such as the annual exemption of up to £3,000 per tax year. If unused, this can be carried forward for one year.

There is also the small gift allowance of up to £250 per person per year (which can be given to multiple people), provided they have not been in receipt of the other exemption.

Habitual gifts from surplus income

An individual can also make regular gifts made from their surplus income (not capital) that do not affect their standard of living. There has been a rise of late in utilising assets to produce this natural income and subsequently gifting this money as surplus to beneficiaries.

As with all gifts, it is important to keep a record of these to ensure the estate is assessed correctly.

Financial plan

Clients in this position often have concerns that if they give significant sums away, they may be depriving themselves and may one day need this money. They often cite rising care costs as one item of expenditure that they need to plan for. The role of a financial adviser can be crucial in using forecasting and models to show the sustainability of withdrawals and the potential longevity of assets.

There have been recent, widely publicised changes to the treatment of pensions for inheritance tax purposes, and a financial adviser will ensure that the financial plan is adjusted to keep on top of any changes in legislation.

Comment

In summary, lifetime gifts as part of inheritance tax planning are often underused and can be more cost-effective and simpler than other options. A financial planner can include these steps as part of an overall financial plan to deliver outcomes that really matter.