Reducing your inheritance tax bill

1. Think of yourself first

Once you’ve made a will, set your future income expectations. Assess your lifestyle and health, and don’t forget to account for inflation.

2. Appraise your assets

Check to see if you’re on course to meet your income targets. You need to thoroughly assess everything, including pensions, properties, ISAs, businesses and dividends.

3. Work out how much is left

If you’re on track to achieve your desired lifetime income, the next stage is to establish whether there’s extra to pass on. The sooner you do this, the better.

4. Work out how much to leave behind

If there’s surplus capital, decide when and how much money to leave. There are a range of inheritance tax planning opportunities but these come with different rules, time constraints and obligations. Your personal situation will determine which will work best for you.

5. Think about giving

You can give money to your family, and if you live seven years from the date of the gift, this will be fully outside your estate for inheritance tax purposes (tax relief may be available if you die within seven years). There’s also an annual gifting exemption of £3,000 per year than can be used alongside other small exemptions – a financial planner or tax adviser can help you with this. 

6. Think about establishing a trust

If you have concerns about your beneficiaries’ abilities to manage gifts, because they’re too young or you’re concerned about other family members accessing the money, you could consider setting up a trust. Your Wealth Planner can help to find the best options available and help you choose professional trustees to act on your behalf.

7. Consider Business Relief

Giving money away means it’s no longer under your control. An alternative to this is investing in Business Relief shares. To qualify for inheritance tax exemption, Business Relief shares can’t be listed on a stock exchange. Because Business Relief shares tend to be higher risk, with values that can fluctuate significantly and no guarantee of a readily available buyer, you should speak with a professional adviser before investing.

8. Whole of life insurance

Insurance can help to cover the inheritance tax bill. Buying a whole of life insurance policy is no more complicated than taking out a normal life insurance policy, except that you request the pay-out go into a trust so it’s exempt from inheritance tax. The pay-out can then be used to cover the inheritance tax bill on your estate. This means your beneficiaries may not have to sell your home or stump up to cover the tax on gifts you may have given them in the last seven years. It’s important to get professional advice to ensure there are no additional tax implications and that the policy is paid as per your wishes.

9. Protect your pension

Maintaining your pension pot is another way to keep the taxman from taking your family’s inheritance. Unlike ISAs and other savings products, pensions aren’t normally subject to inheritance tax and can be passed to loved ones when you die. Spending down other taxable areas of your estate before calling on the pension makes sense.

10. Diversify your options

Whichever route you choose, remember the rules can change and sticking to one course of action may prove risky. Consider combining a range of inheritance tax planning approaches to cover you. Talking regularly to your professional adviser will ensure your family receives a full and lasting legacy.