Benjamin Franklin said, “In this life nothing is certain but death and taxes”. When anyone who is resident or domiciled in the UK dies those they leave behind will find that HMRC will want a slice of the dead person’s estate – their money, house, possession etc.

This tax used to be called Death Duties but now is called Inheritance Tax and is payable by persons resident or domiciled in the UK at 40% of the value of the estate over £650,000. That may sound a lot but given the value of many houses it is all too easy for even those of modest means to find the tax applies to them.

There are many complicated and costly methods that can be employed by those with very large estates but the following simple methods should be used by everyone to reduce and even remove any liability to inheritance tax.

1 – Make a will

According to the Law Society one in three people die without having made a will. They assume that everything will automatically go to their spouse and so be exempt from tax. That only applies to couple who are married or in a civil partnership when the first of them dies, and of course when the second person dies the whole lot becomes liable to tax anyway. But if you die without leaving a will not all your money goes to a surviving spouse as other family members are entitled to a share and even if they don’t claim it the tax man will still want the tax to be paid. So the first thing to do is make a will. This isn’t very costly to have done by a professional who will be able to advise you on what is best for your particular circumstances. Many solicitors will also provide free wills for a donation to a particular charity.

2 – Make cash gifts

Gifts made more than seven years before you die are free of inheritance tax so long as you don’t retain any benefit. So don’t give your house to your children and continue to live in it (though you might be able to do so if you pay them a market rent). But if you give them money or stocks and shares then no matter what the value if you live for seven years that value does not count towards your total estate. If you die before the end of seven years a portion of the value – depending on how many years you lasted out for – is free of tax.

You can also give away a total of £3,000 a year, which will be exempt from inheritance tax even if you drop down dead the next day. You can also give up to £5,000 to each of your children when they marry and any number of gifts up to £250 may be made. Regular gifts from income, which do not reduce your standard of living, are also exempt.

3 – Put insurance policies into trust

Write any life insurance policies you have into trust to make sure they are paid out free of inheritance tax after your death. While pension policy providers usually set up pension funds in trust automatically, you have to ask for this to be done by life insurance providers. Most insurers have standard documentation.

4- Use a discretionary will trust

Married couples automatically combine their inheritance tax allowances on the death of the first person. When the second member of the couple dies, twice the nil-rate band at that time is applied to the remaining estate (£650,000 this year). This has removed some of the benefit of discretionary will trusts, under which couples used to transfer assets up to the value of the nil-rate band into trust in order to use up both allowances on the death of the second person.

However, they can still be useful. For example nursing home or residential home fees, that might be payable by a surviving spouse if they went into care, could be avoided by not allowing all the assets to pass to them when the first spouse to die does so. In addition assets held in a discretionary will trust are ring-fenced from the local authority means test, which means they are not taken into account when assessing whether somebody receiving long-term care must pay some or all of their costs.

5 – Investigate the use of trusts

Trusts have long been a very useful way to mitigate tax liabilities and ensure the ongoing flow of wealth from generation to generation. However, many of the benefits of trusts have been eroded since the 2006 Budget, in which the Government announced new taxes on such trusts.

Despite this there are still circumstances in which trusts can be used effectively, for example when you put business assets into a trust.

There are various types of trust and you will need to take advice from an expert to find out which of them would be best for you. However apart from circumstances where you are putting business assets into a trust another possible use is for you to “lend” money to a trust and receive tax-free repayments of, usually, five per cent of the capital per year, although you do not have to take repayments. In such circumstances any capital growth is also deemed to be outside your estate for inheritance tax purposes.

If you would like further information please contact your professional advisor or send an email to James Green & Co for someone to contact you and offer guidance. You can have up to 30 minutes free telephone consultation by appointment.

Other posts that may be of interest are:

Also See – Category: Taxation

2 Responses to “Five Ways to Save Inheritance Tax”

  1. James Green says:

    James, if you let me have a phone number I’ll give you a call. However, the questions you ask cannot be answered without a lot of further information other than to say “yes and no” – which doesn’t help. Frankly if you are UK resident and UK domiciled then you might avoid future CGT and IHT but there could be charge to Income Tax now – at a higher rate than CGT!

  2. James Mitha says:

    Can you please advise on the following,

    Would it be correct in saying that if property in the uk were to be transfered into either a company, trust ect in the isle of man then this property would be exempt from CGT or IHT.
    Same with money invested in say a bank account or bonds etc in the IOM
    I need to speak to some one regarding the options.Can you please arrange for some one to call me ASAP so I can explain more in detail.

    Thank you


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