Top 7 Tips & Tricks for Reducing Inheritance Tax

Top 7 Tips & Tricks for Reducing Inheritance Tax

For families looking to pass on their assets to the next generation, inheritance tax can be a significant financial burden.

While inheritance tax is compulsory in the UK, with careful, strategic planning, there are ways you can minimise the amount of tax your beneficiaries would need to pay.

In this blog, we’ll explore five effective tips and tricks to help you reduce inheritance tax, ensuring that your loved ones receive more of what you’ve worked so hard to build.

What is Inheritance Tax?

Inheritance tax is a fee imposed on property, savings, or possessions that might be left behind by loved ones. It comes into play when the total estate value surpasses a specific threshold, referred to as the ‘nil rate band’ (NRB). As of September 2023, the current NRB stands at £325,000.

For married couples and civil partnerships, any unused portion of the NRB can be transferred to the surviving spouse, which effectively doubles the threshold to £650,000.

There are also special provisions in place for passing on a family home to direct descendants, which can further increase the threshold.

Inheritance tax is set at a 40% rate for estates exceeding this threshold. However, some exemptions and reliefs may apply, such as those for gifts, business assets and certain types of trusts.

7 Top Tips to Help Reduce Inheritance Tax

Leave your Estate to your Spouse or Civil Partner

One of the most straightforward and effective strategies for minimising inheritance tax is through your spouse or civil partner. Under English law, assets left to a spouse or civil partner are often exempt from inheritance tax. This means that upon your passing, your assets can be transferred to your partner without incurring any tax liability.

Leverage pension planning

Pension planning is an often overlooked method for reducing inheritance tax. As pensions are not considered part of your taxable estate, they are an excellent tool for helping to preserve your assets.

By maximising contributions to your pension fund, you can ensure that more of your assets are shielded from inheritance tax. Be sure to consult with a financial advisor who specialises in pension planning to optimise this strategy for your circumstances.

Take Out a Life Insurance Policy

Life insurance is a great way to insure against inheritance tax. By setting up a life insurance policy, you can provide a tax-free lump sum to your beneficiaries, without having to dip into the assets you have left them.

Additionally, life insurance can be used strategically to distribute your assets equally between your heirs. This can be particularly useful if you have a complex family structure, or if you wish to ensure that specific individuals receive a fair share of your estate.

Give your assets away as gifts

One of the simplest strategies you can implement to avoid inheritance tax altogether is to either spend your savings or give them away during your lifetime, meaning that you can gradually transfer your wealth to your loved ones.

The amount you are allowed to give each tax year is up to £3,000. This amount can be split between several beneficiaries. However, if you were to pass away within seven years of gifting your assets, you would have to pay inheritance tax. Fortunately, you might be taxed at a lower rate under the ‘taper relief’.

Set Up a Trust

A trust is a legal arrangement that allows you to set aside assets for the benefit of specific individuals or groups. This could be an invaluable tool for reducing inheritance tax, as assets placed in a trust are not considered part of your taxable estate.

There are various types of trusts, such as discretionary or charitable trusts. To determine which is the right trust for your specific goals, it may help to speak to a financial advisor.

Leave money to a charity

A wonderful way to reduce inheritance tax while making a positive impact is by leaving a portion of your estate to a charity. If you leave at least 10% of your estate to a registered charity, the tax rate on the remaining estate drops from 40% to 36%. This means more of your hard-earned assets go towards causes you care about.

Before finalising this decision, it’s a good idea to research and select a charity that holds special meaning for you.

Document your Intentions Clearly

One last and yet crucial tip is to document your intentions. Ensuring your wishes are clearly documented in your will and any associated legal documents can help prevent misunderstandings and disputes down the line.

Financial Life Planning Services from Hansford Bell

At Hansford Bell, we understand how important it is to preserve your hard-earned wealth for your loved one. With years of experience and a team of dedicated financial planning experts, we’re here to help you make informed decisions about your estate.

If you’re concerned about inheritance tax and want to explore effective ways to safeguard your legacy, don’t hesitate to get in touch.

A Fresh Approach to Financial Planning and Advice.

Hansford Bell aren’t your average team of financial specialists. We take the time to get to know our clients and help them realise what they want from their life, whether that’s a personal ambition or a financial goal.

Our planners are highly experienced and know the industry inside-out. We combine simplified, straight-forward tips and guidance with cutting-edge technology and a comprehensive understanding of your situation. We focus on your finances, so you can focus on living your life.

Want to know more? Talk to us today and we can start making that dream future a reality!