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Inheritance tax: five ways to minimise a bill upon death

Paloma Kubiak
Written By:
Paloma Kubiak

No-one wants to think about dying but it’s important to organise your estate to plan for inheritance tax purposes and Carl Drummond, wealth planner at Sanlam shares his top tips to minimise the bill so more can be left to your loved ones.

Since the start of the year, a number of celebrities have passed away, including broadcaster Terry Wogan, musician David Bowie and actor Alan Rickman and sadly, these act as a timely reminder as to why you need to make preparations for the end of your life.

One of the main concerns is to minimise the inheritance tax bill and here five top tips:

Spend your money

It may seem simple, but to reduce your inheritance tax bill, spend any excess savings you’re confident you won’t need in the future either to provide an income or to access capital.  This way you can avoid the hefty tax of 40% that you would be liable for assets reach over £325,000. Before you splash the cash, it’s important to note that if you are married or in a civil partnership, then on death, any of your estate which passes to your spouse does so without any inheritance tax to pay. This effectively doubles the amount the surviving partner can leave behind tax-free (£650,000).

Financial gifts

If you decide to give your money away, you have an individual allowance of £3,000 which can be gifted each year without any tax implications. You can give away more, but if you die within seven years then the additional money gifted could be subject to inheritance tax. However other monetary gifts made on or shortly before a wedding, or ceremony or individual gifts of up to £250 per year, do not incur inheritance tax. You can also gift any amount from your regular income which doesn’t change your normal standard of living. So if you earn £40,000 a year and your expenses are only £20,000, you can gift the extra money.

Give to charity

There’s no inheritance tax payable on gifts made to a charity so if you leave 10% of your estate to charity, the tax due on the estate overall would be closer to 36% than 40%.

Use your pension

Under the new pension freedoms, it’s now possible for certain types of pension funds to be passed down or inherited by successive nominated individuals. On the death of an individual with a pension drawdown fund, the value of the pension will not form part of their or a successor’s estate for inheritance tax purposes. This can be useful where funds are not required immediately, as those funds can be cascaded down to dependants and other family members, who can continue to benefit from the tax exemptions provided by the pensions wrapper.

Buy an insurance policy to cover the bill

A ‘Whole of Life’ policy is an insurance policy which provides a lump sum on death to a policy holder’s beneficiaries. This type of policy is often used as a way of providing the funds to your beneficiaries which is used to pay an inheritance tax bill. Ensuring the policy is written under a suitable trust means the money paid out would not be subject to inheritance tax.

Carl Drummond is a wealth planner at Sanlam, a UK wealth management business.