I have been advising families since 1999 and over the years, I have acted for several clients who simply wish to avoid the topic of death. In doing so, they are inadvertently failing to act in the best interests of their family. Over the years, I have also acted for clients who wish to prepare for the future and ensure that their wealth is preserved for their family. Many of these clients often ask me, “how can I prepare for inheritance tax?”

Inheritance tax is charged on your estate when you die. An inheritance tax charge is due on your death if your estate is worth more than £325,000. The current rate of inheritance tax that you have to pay is 40%.

In this blog article, I list some steps that you can take to prepare yourself for inheritance tax. In doing so, you can be sure that most of your estate will go to your loved ones.

(1) If there’s a Will, there’s a way! (Write a Will)

A will can ensure that your assets are passed to your loved ones rather than in a manner dictated by the government. A lawyer can advise you on how to best structure your will or your estate.

(2) Gifts, gifts, gifts! (Give during your lifetime)

Gifts you give during your lifetime may become subject to inheritance tax without careful planning. With careful planning, however, you can utilise gifts to reduce the value of your estate, resulting in a reduced inheritance tax bill. For example, there is an annual exemption of £3,000 that you can give away without incurring inheritance tax liability. You can also give £250 to as many people as you like. Donation to charities of whatever amount are tax free. There are also tax exemptions for wedding gifts from parents (£5,000), grandparents (£2,500) and anyone else (£1,000).

You can of course make cash gifts larger than £3,000, but the rule is that you will have to survive seven years for the gifts to be free from inheritance tax. Basically, if you die within seven years of making the gift, the value of the gift is clawed back in to your estate and will be chargeable to inheritance tax.

(3) Got any spare cash? (Use excess income)

Your assets are classed by the HMRC as either capital or income. Income is the money you have coming in every month (e.g. your salary, state pension, occupational pension, rental income, interest from investments, dividends, etc). If after paying your bills and living expenses, you have excess income, you are allowed to make gifts of money from the excess to people free of inheritance tax. You should seek the advice of your lawyer as good records are required to obtain the inheritance tax exemption.

(4) Where there is charity, there is wisdom! (Give to charity)

Gifts to charity (whether you make them in your lifetime or in your Will) are exempt from inheritance tax. In fact, if you give more than 10% of your estate to charity (less £325,000), then your inheritance tax rate will be reduced from 40% to 36%. It is important that you seek a lawyer’s advice when incorporating this gift into your Will so that the correct wording is used to avail the reduced tax rate.

(5) Learn to trust! (Use a trust)

You can place up to £325,000 (tax-free) into a trust every seven years. The money placed in a trust is outside of your estate and will not be taxable on your death. This can be a very tax effective way of reducing the value of your estate and hence your inheritance tax bill. For example, if you place £325,000 into a trust at the age of 60, then another £325,000 into another trust at the age of 67, then another £325,000 at the age of 74, then you would have removed £975,000 from your estate. A potential inheritance tax saving of £390,000.

(6) Ensure to insure (take out life insurance)

Your life insurance payout can cover your inheritance tax bill which can in turn minimise the financial impact of your death on your loved ones. To ensure that the life insurance is not taxable, as highlighted above, put it in a trust.

7. Ask a lawyer for help

Firstly, a lawyer can help you establish the value of your estate to see if you are going to be liable for inheritance tax. Secondly, a lawyer will be able to evaluate your individual circumstances and advise on what you can do to plan for your death and inheritance tax.

Delfin Posada is a Partner at Posada & Co Solicitors and Beach Law and has been advising individuals and families for over 15 years. Delfin is passionate about helping individuals and families achieve their aspirations and objectives through sound estate and succession planning, family and business governance and inter-generational wealth transfer.