Inheritance Tax is the tax paid on the money and possessions you leave behind when you die, if the value is greater than the Inheritance Tax limit once any debts or outstanding payments have been deducted.
Anything over the Inheritance Tax limit which is currently £325,000 will be liable for tax payable at 40%.
Reducing your Inheritance Tax Bill
Leave everything to your partner
You don’t pay inheritance tax if you leave everything to your partner as long as you are married or in a civil partnership. In addition to inheriting the estate, your partner would also inherit your £325,000 tax allowance. Therefore when they die, inheritance tax will only be paid if the value of the estate is greater than £650,000.
Make a gift to family or friends
If you give limited amounts every year to friends or family, you may not have to pay Inheritance Tax. Alternatively, if the gift is greater than the allowable limit, it is only classed as part of your estate for 7 years.
Put things into a Trust Fund
Some Trust Funds are not liable for inheritance tax as they no longer form part of your estate however the rules are complicated so it is worth getting advice from an expert who deals with inheritance tax planning.
Leave something to Charity
Donations or gifts to charity, usually made when writing a Will, are tax free so a useful way to reduce your inheritance tax bill. Also if the value of your estate is over the threshold and you leave at least 10% to charity, the rate of tax you pay will reduce from 40% to 36%.
Take out Life Insurance
As part of your Inheritance Tax planning you may wish to consider taking out a whole of life insurance plan, sometimes referred to as an Inheritance Tax Insurance plan, in order to offset your tax bill - make sure the life policy is written in Trust, as if you don't you will end up paying more tax as your estate will be worth more money - if you are unsure as to your needs you should seek independent financial advice.