With ever-increasing property prices, more and more people’s assets are

now worth more than the inheritance tax threshold of £285,000,

which has never been increased in proportion to the recent property

boom. With a rate of 40% inheritance tax on any assets above the

£285,000 threshold in the estate, this can really put a dent in

what your heirs receive from your estate.

Inheritance tax is levied upon a person’s death. Once all of their

assets have been totaled up, anything over the threshold will have to

be paid by the executors of their will.

It’s becoming increasingly difficult to avoid inheritance tax, but

there are some strategies that you can put in place to help minimize

its impact. Inheritance tax is an extremely complicated subject,

though, so you should never attempt to make any plans yourself without

good professional advice, otherwise you may end up making your tax

situation worse.

Make a will

First, make a will. This in itself won’t help you to avoid inheritance

tax, but it will make your intentions clear so that any inheritance tax

planning you have put in place will come into effect.

Transfers between spouses

If you’re married or in a civil partnership, both of you should attempt

to use your full threshold separately.

Husbands and wives or civil partners can transfer assets (such as

property) to each other without incurring inheritance tax. However,

this will increase the value of the surviving partner’s estate, which

will be subject to tax when they die. If this brings it above the

threshold, inheritance tax will then be due. Another possibility is to

bequeath your estate to someone other than your spouse, for example

your children. However, this has its own complications and is not

always appropriate.

Gifts

If you want to give something away during your lifetime but still keep

using it, the Inland Revenue may still consider it part of your estate

for tax purposes when you die. Such gifts are regulated under the

‘inheritance gift with reservation’ rules. For example, if you sold

your house to your children you may have to pay full market rent. Also,

they could be liable to pay capital gains tax on it if it is a second

property for them.

However, within certain guidelines you can give away some assets and

gifts to friends and relatives, known as ‘potentially exempt

transfers’. These will not be subject to inheritance tax as long as

they are given at least seven years before you die. If you die within

seven years of giving a gift, tax will have to be paid on a sliding

scale.

Some gifts are completely exempt from the inheritance tax rules. You

can gift up to £3,000 in any tax year, plus up to £3,000 in

unused allowance from the previous year. Unused allowance can only be

carried forward from one previous year. There’s also an allowance for

wedding gifts to children (up to £5,000 for each child) and

grandchildren (up to £2,500 per grandchild) and other friends and

relatives (up to £1,000). A small gift allowance of £250

per recipient per year is also permitted.

Some gifts, however, may be subject to capital gains tax if any income

is made from them, e.g. if they are invested in stocks and shares.

Gifts to charities

Gifts to registered charities and political parties are always exempt

from inheritance tax.

Trust funds

In some circumstances, it’s possible to set up a trust fund. However,

the rules regarding trust funds were changed in the 2006 budget to

restrict inheritance tax avoidance in this way so it’s not always a

feasible option. Most money held in trust for children will be subject to inheritance tax after

they reach 18 unless they are disabled.

Life policies

Certain types of life policy are exempt from your estate under

inheritance tax rules. So, it may be possible to pay regular sums into

such a policy, either towards a trust or towards your children, in the

hope that it will make enough money to pay some or all

of the inheritance tax bill at the same time as reducing the size of

your taxable estate.