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How to avoid paying inheritance tax


1st Jan 2015 Managing your Money

How to avoid paying inheritance tax

Inheritance tax is one of the most hated taxes of all. But, with a little effort, it can be surprisingly easy to avoid.

Who has to pay Inheritance Tax?

It was traditionally only paid by the rich, but thanks to rising house prices, that's no longer the case. If you own a home in London or the South East, or a regional property hotspot, it's easy to fall into the net. That's a big worry, because inheritance tax is charged at a whopping 40% of all your assets above £325,000, including your family home.

If your home is worth £400,000, and you have £25,000 of savings and other assets at death, £100,000 of your assets will be subject to tax. At 40% this means handing over £40,000 to the taxman. That's the bad news. The good news is that there is plenty you can do to reduce your family's inheritance tax bill. Even better, the rules are being eased, allowing you to protect more of your money.

From next April, any money in your pension pot when you die will be free of inheritance tax, thanks to Chancellor George Osborne's recent overhaul of the annuity system. Many better-off people will now start saving in a pension with the specific aim of reducing their family's inheritance tax bill. You might want to do the same.

Other ways to cut your inheritance tax liability 

  • Married couples and registered civil partners pass on their £325,000 inheritance-tax allowance to their partner when they die.
  • This doubles their tax-free allowance, making the first £650,000 of their estate free of inheritance tax. The rule doesn't apply to cohabiting couples, however.
  • You can also cut your tax liability by making gifts out of your estate before you die. But watch out: you have to survive for a further seven years for the gift to be completely exempt.
  • You can make further tax-free gifts of up to £3,000 a year to whoever you like with no inheritance-tax liability. Married couples can gift £6,000.
  • You can also give wedding gifts free of inheritance tax. Parents can each give cash gifts worth up to £5,000, grandparents can each gift up to £2,500. Anyone else can give up to £1,000.
  • You can make small gifts up to the value of £250 to as many individuals as you like in any one tax year (unless you have already given them any other gifts).

Think carefully before giving too much away, just in case you need it later.

Inheritance tax may be less of a worry in future. Prime Minister David Cameron recently hinted that the government may increase the inheritance-tax threshold to £1 million. If he does, avoiding inheritance tax will be even easier than it already is.