It’s not something anyone wants to think about for too long, but unfortunately Inheritance Tax – sometimes called the ‘death tax’ – is in the news again this week due to fears that the new Labour government might look to the tax as a way to raise money for the UK’s ailing coffers.
New Chancellor Rachel Reeves is expected to announce funding cuts to plug a £20billion ‘black hole’ in public finances which Labour says is due to unfunded National Insurance cuts by the Conservatives.
While Labour has promised not to touch VAT, National Insurance or Income Tax, it has still led finance speculators to worry whether other taxes like Inheritance Tax could be reassessed.
Whether that happens or not, there are still thousands of people who get caught up paying Inheritance Tax each year.
Now while it’s important that everyone pays their fare share, it’s still prudent to avoid paying more tax than you have to because of poor planning or a bad financial decision.
The Inheritance Tax threshold is currently £325,000 for 2024-25 and has been frozen at this level for many years, dragging more and more people into paying it as the value of houses rises, meaning property and estate cash left behind is becoming subject to Inheritance Tax more and more, in a phenomenon known as fiscal drag.
So these are the best legal ways to avoid paying Inheritance Tax.
First is gifting. Simply gifting money to people during your lifetime is free of tax. Each year you can give away up to £3,000 in gifts, split between as many people as you want. You can also make unlimited gifts of up to £250 on other people as well as long as you don’t use your £3,000 allowance on the same person.
The amount you can give to relatives is higher; £2,500 to grandchildren and £5,000 to children.
The downside is this must be done seven years or more before you die or it could still be subject to a tapered inheritance tax from the estate.
Similarly, leaving money to charity is free from Inheritance Tax. If you put a charity in your will, your estate won’t pay any tax on the amount given to charity. So, for example, if you’re going to leave £350,000 worth of assets behind, you could donate £25,000 to charity and leave a £0 tax bill behind because only money over the £325,000 threshold is subject to tax.
And if you leave more than 10 percent of the value of your estate to charity, the inheritance tax rate for the entire estate will fall from 40 percent to 36 percent.
Another option if possible is to leave your estate to your husband or wife. Your spouse will never pay Inheritance Tax on your estate regardless of the amount. And when you die, your spouse inherits your Inheritance Tax threshold, boosting their total threshold to £700,000. Considering many spouses share assets like property and savings, this could avoid paying any tax on the estate when the spouse then dies and leaves it to the children.
Property Allowance is another option: if you use Property Allowance, this will increase the tax-free threshold to £500,000, but only when passing down a property to children. Married couples get £500k threshold each, meaning you can pass down a house worth up to £1M tax-free.
