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How to reduce your inheritance tax bill

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Thousands of families will be left worse off today when the government confirms plans to freeze the amount people can inherit free of tax to help pay for care for the elderly.

The allowance is expected to be frozen at £325,000 despite Chancellor George Osborne just eight weeks ago saying he would increase the amount in two years.

Osborne has decided the limit will not go up until at least 2019, leaving thousands of families worse off than if the threshold had increased.

The inheritance tax (IHT) freeze will help fund the introduction of a £75,000 cap on social care costs.

Being able to leave an inheritance is important to many people, and the decision not to increase the inheritance tax threshold will have financial planning implications for anyone hoping to leave money or assets to their loved ones.

Matthew Stephens, inheritance tax expert at Prudential, said:

“Plans to freeze the inheritance tax threshold until at least 2019 mean that many people could potentially face a sizeable tax bill if they do not plan ahead.”

The most effective way to reduce your IHT bill is to reduce the size of your taxable estate.

The greater the value of the estate above the IHT threshold, the more IHT will be paid. Reduce the amount of the estate above the IHT threshold and save the amount of IHT you pay.

This normally means giving money away, either in one lump sum or by regular amounts, known as gifting.

Exempt gifts are free from IHT immediately and potentially exempt gifts are gifts which become exempt from IHT over time.

Danny Cox of Hargreaves Lansdown explains them in more detail:

Exempt gifts 

Exemption for married couples – married couples can transfer any amount of assets between themselves free of inheritance tax, either during their lifetime or on death.


Annual exemptions – in each tax year, you can make a gift up to the annual exemption of £3,000 to a person(s) of your choice. On top of this, any unused exemption from the previous tax year can be carried forward to the present tax year but no further.


Gifts from income – you can make regular gifts out of income but you must show these gifts are made from your post-tax income; are habitual (though not necessarily annual); and leave you with sufficient income to maintain your standard of living. This substantial concession is widely under-utilised, particularly by those with higher incomes.


Marriage gifts – parents and grandparents can make one off gifts on the marriage of children or grandchildren (up to £5,000 and £2,500 respectively).


Small gifts – in each tax year you can gift up to £250 to any number of people completely free of inheritance tax.


Donations to charities or political parties – gifts to these types of organisation, either during your lifetime or via your Will, are exempt from inheritance tax.

Potentially Exempt Transfers (PETs)

If a gift is not immediately exempt, it will usually be free from inheritance tax assuming the donor (the person making the gift) lives for at least seven years from the date of the gift. In theory, there is no limit to the value you may gift in this way, so a considerable sum (even the majority of a person’s assets) could be passed on via PETs.Even if the donor does not survive the full seven years required by a PET, there can be a tax saving based on a sliding scale. Note this taper relief does not apply to gifts which fall into your nil rate band. When your estate is assessed for IHT the gifts that you have made are counted against your nil rate band first, so these are subject to inheritance tax at 0% and no tax is paid.The taper relief acts when the total of the gifts made exceeds the inheritance tax threshold.


If you want to make a gift for tax planning purposes but don’t want the beneficiaries to collect their gift now, you could use a trust. A trust allows the gift to be made and starts the 7 year clock ticking (see gifting), but the distribution of money or assets delayed until such time as is appropriate. For example, if the beneficiaries are aged under 18, or perhaps you don’t want them to receive the proceeds until they are 25 or 30 (unless in an emergency).









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