All of the property, investments and possessions you’ve built up over the years are testament to your hard work and dedication to your family.

Put together, these assets form your estate, which will be distributed to any beneficiaries who stand to benefit from your will when you die.

However, a portion of your estate may be liable for inheritance tax at 40% if it’s worth above a certain threshold, meaning your beneficiaries won’t receive everything you want them to.

There are various ways to protect your estate from unnecessary tax charges, however, which we’ve explained in detail in this blog.

Make the most of gifts

The obvious way to reduce any potential inheritance tax bill on your estate is to gift some of it away before you die.

That way, you can bring the value of your individual estate below the £325,000 threshold, reducing any liability in the process.

Each tax year, you can give up to £3,000 away as a gift. You’re also allowed to make unlimited gifts of up to £250 to others, too. 

Gifts worth more than this, however, might be within scope of  the seven-year rule. 

The rule means you can give away however much you want and your beneficiaries won’t have to pay a tapered tax rate if you live for the next seven years.

If you die during those seven years, the gift will be taxed at various rates that depend on exactly when you die:

  • three to four years after the gift was made: 32%
  • four to five years: 24%
  • five to six years: 16%
  • six to seven years: 8%
  • seven or more years: 0%.

If you continue to benefit from the transferred asset or property, its value will be taxed, even if you just enjoyed a subsidised rent to live in the family home you gifted away.

For it to be a gift, remember: you are not signing away possession of the gift but full benefit of it.

Put your money into a trust

A lot of people we’ve talked to have been nervous about the idea of putting money into a trust for inheritance tax purposes, but it can be one of the most tax-efficient things you can do.

A trust is a legal agreement in which you place money, property and investments into the hands of a trustee to look after on your beneficiary’s behalf.

There are different types of trusts with different functions, but the way in which it will be taxed depends on what type of trust it is. 

You’ll usually face a 20% tax charge when setting up a trust if its value exceeds the nil-rate band, although there are some exceptions to this broad rule.

Every 10 years thereafter, the assets held in trust need to be revalued. A 6% charge will apply on the total value of the assets, minus the nil-rate band. 

So, while you have to be careful from your approach, get it right and you stand to pass more on than otherwise to your loved ones. 

Donate to charity

Just like gifts that you leave to your partner or children, parts of your estate that you leave to a UK charity are also exempt from inheritance tax.

If you leave more than 10% of your estate to charity in your will, you’ll pay a reduced 36% tax on the total value of your estate above the threshold.

So, if your estate was worth £525,000, it would face a £80,000 tax charge (40% of £200,000). But, if you gave away 10% of your taxable estate to charity (£20,000), it would face a £64,800 charge (36% of £180,000).

Call us on 01462 420042 or fill out a contact form to talk about other estate planning methods.