8 Tips to Legally Avoid Inheritance Tax

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By Crispin Bateman

on Tuesday 31 July 2018

If you are looking at passing on your home, savings and possessions to your loved ones once you die, you will probably have worried at least a little about inheritance tax (IHT). There’s plenty of scaremongering about the system and it’s easy to believe that your assets will be stripped of 40% by the tax office, or that you’ll so something wrong which affects your heirs.

Don’t worry! Here at Compare UK Quotes, we have plenty of advice to help you. You’ll already have read our guide to inheritance tax, now read on for eight handy ways to cut your inheritance tax – completely legally!


#1 Know Your Nil Rate Bands

Not a reference to the Top 40 singles chart, Nil Rate Band (NRB) is the threshold under which you don’t have to pay inheritance tax – and it’s a sizeable amount. Currently, it’s set to £325,000 which means, quite simply, that if you are passing on assets worth £325,000 or less then there’s no inheritance tax to pay. None. Nada. Nil.

Of course, property is the big thing that can easily push on the edges of the NRB, but there’s a little extra to help there too. Avoiding inheritance tax on property is made easier thanks to the RNRB – or the Residence Nil Rate Band. This is an extra amount which is additional to the overall NRB which counts for property left to children or grandchildren. In this tax year, 2018/19 it’s set to £125,000 but it’s rising by £25,000 each year until 2021 so will likely be higher when your estate is all calculated.

The RNRB only applies to children (including step-children and adopted children) and grandchildren, but it adds that extra boost to allow them to keep the home without worrying about IHT.

#2 The Seven Year Stretch: Inheritance Tax and Gifts

Unfortunately, you can’t just give your money and house away in the months before you die and hope it’s outside of IHT. Neither can you sell your house for £1 to your grandson and get away with that. A shame, for sure!

To prevent this type of simple avoidance scam, the tax office instigates a seven-year rule on gifts with regard to inheritance tax. Almost anything you gave away in the seven years before your passing is 100% liable to inheritance tax. Of course, with every rule, there are exceptions and with gifts you are entitled to pass on:

  • £3,000 worth of gifts each year. This can also roll-over to £6,000 in a second year if not used.

  • £5,000 for the occasion of a child’s wedding or £2,500 for a grandchild’s happy day.

  • Money to help the living costs of a child (under 18), elderly dependant or ex-spouse.

  • Money from your surplus income (additional money once all your living costs are paid for). A good example of this is regularly putting money in a grandchild’s savings account.

It’s valuable to keep records of any gifts you give in this way to avoid inheritance tax.

One important area which cannot be worked around is that of housing – you cannot simply give away your house for it to be lived in, nor sell it for less than market value to a relative. This is especially true if you plan to remain living there.

If you do pass your house on to a relative and remain in situ, you must:

  • Sell for market value, or a reasonable near amount.

  • Pay rent to the new owner of the house, again at market value.

  • Properly document and legalise all transactions.

The difficulties in transferring hands of a home in this way, plus the level of trust required, are such that usually it isn’t worth doing.

Giving away a home to avoid inheritance tax on property has issues beyond the usual seven-year period. If you give away your house (for substantially less than market value) and continue to live in it (for less rent than market value) then it will count for inheritance tax no matter how many years have passed.

If you wish to pass your house on to another before your death, then it is worth seeking specialist advice. Compare UK Quotes are here to provide that advice – fill in our contact form and we can contact you at a time of your choice.

#3 Be Married (or in a Civil Partnership)

Your spouse or civil partner can inherit your estate in full without being subject to IHT. Additionally, if this is done then they hold your nil rate band value when they then pass on the possessions to your loved ones.

What this means is that if you have an estate valued at £650,000 between you, and you die first and pass it all on to your spouse, when they then die and pass on the estate, none of it is liable for inheritance.

Again, documentation is important and good records can help stop a lot of headaches.

#4 Give to Charity

If you choose to pass your estate on to a charity, then the entire amount will be exempt from inheritance tax. There is no limit to the amount that can be passed to a charity.

#5 Use Life Insurance to Pay the Inheritance Tax

While not quite avoiding IHT, having someone else pay for it is pretty close! A properly set up life insurance policy which pays into trust will enable you to cover the inheritance tax for your heirs and absolve them of any of the responsibility.

In order to do this, you would take out a life insurance policy (either level-term or whole of life) which has a sum assured equal to (or greater than) the expected total inheritance tax amount. Upon your death, this policy would pay out to a trust, insuring that it is not part of your estate, and provide an influx of cash set aside to cover the IHT.

#6 Put Some Assets in Trust

Similar to life insurance, other assets in trust do not form part of your estate and are therefore you can avoid inheritance tax with a trust. An example could be to leave money or shares to be used for a young relative when they become 18.

#7 Write a Will

It is important that your wishes for your estate are known, especially if that estate is complex or to be split in a specific way. If you have life insurance, stocks or any other additional assets then make sure they and their intended use are detailed.

Without a will, your estate could be distributed according to intestacy rules and not in a way that was intended by you or in favour for your heirs.

#8 Spend It!

The one person who can use your funds without worrying about any inheritance tax is you! Spending your money before you die is a perfectly acceptable way of avoiding IHT – whether it’s a glorious cruise holiday or a string of impressive parties. It’s your money so have fun with it; you can always bring your relatives along for the ride!