If your estate is sufficiently large, inheritance tax (IHT) may be charged after you pass away. But there are ways you can cut your estate's tax bill and increase the tax-free amount being passed on to your heirs.
Below, we list some options for minimising your inheritance tax. We suggest you seek advice before making any gifts or taking any other actions towards planning your estate.
Leave money to a charity
Any money you leave to a charity, providing it is registered in the UK, will always be free from inheritance tax. The same goes for gifts to political parties, or to local sports clubs.
What's more, if you leave more than 10% of your taxable estate to one of these groups in your will, the inheritance tax rate for the rest of your estate will fall from 40% to 36%.
Leave your estate to your spouse
Your spouse or civil partner will not usually have to pay tax on assets you leave them, regardless of the amount. Making the most of this in your will can save your family a small fortune.
When your spouse then passes away, they'll have inherited your unused IHT allowance, potentially allowing them to pass on up to £650,000 tax-free upon their death.
If they (or you) have remarried, then unused personal allowances can be added together and passed on - but only up to the value of one whole personal allowance (i.e. the most it can increase by is £325,000).
Use property allowances
As well as the standard allowance, there is also an allowance relating to residential property of £175,000 which is again transferable when the second spouse dies. Meaning a further £350,000 is available tax-free.
One of the simplest things you can do to avoid paying inheritance tax (IHT) is to spend your money, or give it away, during your lifetime. No tax is due on any gifts you give, as long as you live for seven years after giving them, and you no longer retain any interest in them.
Each tax year, you're allowed to give up to £3,000 worth of gifts, split between however many people you like - this is known as your 'annual exemption'. You're also allowed to make unlimited gifts of up to £250 to others, too - as long as you have not used another allowance on the same person.
You can also carry any unused annual exemption forward to the next tax year - but only for one tax year.
Exclusive Reader Offer: If you are making a will and want support, as a Reader's Digest customer, you can write one with Which? and get a 20% discount.
Read more: How do I make a will?
Read more: Reasons for making a will
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