8 Free Ways to Avoid inheritance tax

This blog explains why everybody should have their Wills drawn up by a professional. It will also cover why those people with higher levels of assets should consider having Lifetime Trusts placed into their Wills.

Table of contents

8 Free Ways to Avoid Inheritance Tax

This blog is all about what you can do to avoid inheritance tax without having to pay.

SKI

The first thing that you can do is SKI (Spending the Kid's Inheritance). It is your money to choose to do what you want with it. Especially as you grow older and this can be a great way of improving your lifestyle as well as reducing the amount of inheritance tax that you pay.

Small Gifts

An example of a small gift would be giving £3,000 per year. How this affects you depends on your estate. However, for most people, this would not be too significant an amount and could really benefit the beneficiaries. Over time, this money will add up and will remain out of your estate, which will save a lot of money, especially if you are on a 40% inheritance tax rate.

You can also give away £2,500 on the marriage of your grandchildren and £5,000 on the marriage of your children. These financial gifts are for one individual (so in a marriage you could give £10,000 in total) but they have to be gifted before the marriage takes place.

You also have to option to give small gifts of up to £250 to unlimited amounts of people.

GNI

GNI stands for Gifts out of Normal Income. This is areally useful and generally underutilisedallowance. However, it does require having sufficient income as the gift cannot come from capital. Anything that you would be taxed for income tax purposes on your tax return is then usable via this allowance. The gifts have to be regular, and it would be advisable for them to be documented.

Large Direct Gifts

Generally speaking, a gift that is over £3,000 a year would be classed as a large gift. This is also called a Potentially Exempt Transfer (PET) that abides by the 7-year rule. That is, that after seven years there is no inheritance tax to pay on it.

There are also Taper Relief gifts. However, this only applies to gifts in excess of the Nil Rate Band band allowance (currently £325,000).

Large Direct Gifts

Generally speaking, a gift that is over £3,000 a year would be classed as a large gift. This is also called a Potentially Exempt Transfer (PET) that abides by the 7-year rule. That is, that after seven years there is no inheritance tax to pay on it.

There are also Taper Relief gifts. However, this only applies to gifts in excess of the Nil Rate Band band allowance (currently £325,000).

Gifts Into Trusts

This is known as a Chargeable Lifetime Transfer. It isn't technically limited, but if you make a gift which exceeds £325,000, then you pay an immediate inheritance tax charge of 20%. As there are different types of Trusts, you would need sound financial advice. You must always take care to make Chargeable Lifetime Transfers into Trusts before you make any Potentially Exempt Transfers. You must get financial advice here too, to avoid being caught out by complicated tax rules such as the 14-year rule.

£175,000 RNRB (Residential Nil Rate Band)

This is a relatively new allowance. Each person that owns their home on death or has registered it when he/she goes into care effectively get a £175,000 allowance. But it is only usable provided that he/she gifts that amount of money as part of the property directly to his/her direct descendants.

Quite often, you may find a property where either the husband or the wife owns the property. If you don't have the property split, then one person may not get to use that allowance which may be detrimental to the tax planning.

£325,000 NRB (Nil Rate Band)

Every UK domiciled person is entitled to this automatically, and it is transferable between spouses and civil partners. If you are a widow or a widower who has got remarried, you would then have a transferable allowance with your new spouse as well as (potentially) from your previous spouse.

Exempt Assets

Exempt assets are assets that you can buy which, after two years, are out of your estate. An example of this would be if you brought part of a farm or trading company. The only fee would be if you chose to go through a financial advisor.

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