Inheritance Tax (IHT) is one of the steepest taxes in the UK, charged at 40% as standard on your estate on your death.

Before IHT is payable on an estate, you have a tax-free nil-rate band (NRB), currently standing at £325,000 in the 2021/22 tax year.

Additionally, you also have a residence nil-rate band (RNRB) if you pass your home to children or grandchildren. This is £175,000 in the 2021/22 tax year.

That means you may be able to pass on up to £500,000, or up to £1 million if you’re married or in a civil partnership, without having to worry about IHT.

However, if your estate exceeds your NRB, your beneficiaries will likely have to pay the 40% charge on any money or assets you leave to them in your will.

IHT is an issue for every UK resident who exceeds these limits, but particularly for those living in the north-west.

In fact, according to statistics from the government website, the north-west had the most IHT-paying estates in the whole of the north of England, paying out £211 million to the government in the 2018/19 tax year, when data was last available.

That’s why it can be sensible to find methods that help to mitigate your IHT position. So, here are four methods that could help you to pass on as much of your money as possible.

1. Gifting money and assets

One of the most popular ways to mitigate a potential IHT bill is by gifting money or assets during your lifetime. By doing this, you can reduce the size of your estate, while also ensuring that what you have goes to those you choose.

There are a few different gifting exemptions and rules that you can make use of to tax-efficiently pass on your wealth to your family:

Remember: it’s important to keep accurate notes and records of any money you gift to your beneficiaries. That way, the executors of your estate will know not to include it when calculating your taxable wealth.

2. Make use of any business-owner exemptions

If you’re a business owner, you may be able to reduce payable IHT on your business and its assets by using the various exemptions and reliefs available to entrepreneurs.

For example, you may be able to apply for Business Relief, allowing you to pass on qualifying assets up to 100% free from IHT.

Qualifying assets that you may be able to get Business Relief on include property or buildings, unlisted shares, and machinery that you own.

Similarly, you can also gift business assets to someone else, with the value of it falling outside of your estate. However, just as with gifting other assets, you need to survive the gift for seven years or more for it to be entirely free from IHT.

3. Make charitable donations

If you include a charitable donation in your will, you can both reduce the size of your estate and also reduce your IHT rate.

When you leave at least 10% of your estate to charities or political parties, the government will reduce your IHT rate to 36%.

So, rather than paying tax, you can give your money to causes that mean something to you, while also reducing the size of the bill that your family will have to pay on your death.

4. Purchase a funeral plan

Purchasing a funeral plan can be a great way to reduce the size of your estate while also directly helping your family financially.

Funerals can be expensive, with online will writing service Farewill estimating that the average funeral costs nearly £5,000, with some running as high as £10,000.

That means, if you buy a funeral plan from a provider, you can directly remove this amount from your estate.

Additionally, by doing this, you can take away the burden of paying for your funeral from your family. Otherwise, your family would be responsible for paying for these costs on your death.

So, by purchasing your own funeral plan, you can ensure that your family receive as much of their inheritance as possible, while also helping to cover costs at what will be a difficult time.

Work with us

If you’d like help planning your estate to ensure that as much of your wealth as possible goes to your loved ones, please speak to us at LightSide Financial Planning.

Email or call 0151 372 0161 to speak to one of our experienced advisers.

Please note

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.