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Inheritance tax seen as most unfair by Brits - can you cut what you pay?

A new poll shows Brits see inheritance tax as the most unfair tax in the country, yet there are some ways to legally cut your bills when you pass your money and assets on.

If your estate is worth more than £325,000 when you die, you’ll pay 40% on your remaining wealth. Research by YouGov found that 59% thought the current inheritance tax (IHT) rules were unfair. In London and the South that rose to 63% and 65%. Only 22% thought it was a fair tax.

Meanwhile the Office for Budget Responsibility have forecast that 64,000 people will die with assets above the current threshold in 2019/20, double the current number.

So how can you limit how much you pay?

Getting married could reduce your inheritance tax

If your spouse or civil partner leaves all their estate to you, they also pass on their £325,000 Inheritance Tax allowance. You can add this to your own allowance, meaning that your own estate may only have to pay Inheritance Tax if it’s worth over £650,000.  


Tax-exempt gifts

You’re allowed to make gifts of up to £3,000 a year, plus other payments without incurring the interest of HMRC. For example, you can give anyone a gift of £250 a year, providing they don’t receive any other payment from you during that financial year.

You can also make regular payments to relatives who rely on you, such as elderly parents or grandparents or children aged less than 18 (as well as those in full-time education). This can cover maintenance costs, rent or even student loan repayments. You can also give Christmas, birthday and other anniversary presents – within reason – without them attracting IHT.

The seven year rule

And then there’s the seven-year rule. This allows you to give whatever you want to another person without attracting inheritance tax, providing you live for seven years after the gift. There is some flexibility, as ‘taper relief’ ensures the level of tax you estate would owe differs depending on when you die, between three and seven years after making the payment.

The tax rules do have one trapdoor to avoid. If you give someone a gift you can’t continue to benefit from it – unless you are treated as anyone else would. So, you can’t continue to live in your home if you’ve given it to your children, unless you pay rent at the market rate.

Celebratory gifts

If your kids or grandchildren are getting married or entering a civil partnership you can give them a lump sum (or gift of an equivalent sum). Parents can give away £5,000, while grandparents can gift £2,500, and anyone else can give a wedding present worth £1,000 tax free.

Donating and the tax

Any donation to a charity won’t attract inheritance tax if they are recognised by HMRC. And other organisations can benefit from your tax-free gift. These include universities, the National Trust and (perhaps unsurprisingly given who would’ve needed to pass this legislation) political parties with sitting MPs.

Take a note

If you play by the rules and give a proportion of your wealth to a good cause or a relative – who may or may not be a good cause – you can help your beneficiaries by maintaining a log of your gifts. This’ll make it easier for all concerned should HMRC enquire into your outgoings.

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  • W L McConachie / 16 December 2015

    Only things certain in this world....".death and taxes" during life bad enough but to be taxed on what you leave over £325k at 40%, is scandalous and despite vague promises from politicians, allowances have not kept pace with general trends most notably house prices.

  • Geoff Barrow / 30 March 2015

    Inheritance tax is payable from tax-paid earnings and it denies parents and grandparents from helping with university fees and first-time house buying.
    The treasury is very wasteful and the government provides overseas aid to countries who do NOT need aid