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Inheritance tax exemptions: dos and don'ts

Inheritance tax exemptions represent a great way to reduce the amount of inheritance tax to be paid on the value of your estate upon your death. Through careful planning, you can better ensure the assets you have worked so hard to accrue are passed on to the people of your choosing, and not the taxman. But what should you do, and not do, to ensure you make the most of inheritance tax exemptions? 

Our dos and don'ts explain below: 


Plan your inheritance tax and speak to the experts 

Firstly, and most importantly, you should begin your inheritance tax planning as early as possible. Many people do not like to think too much about what will happen when they die, but failure to plan ahead - and not take advantage of inheritance tax exemptions and avoidance - can have a marked financial impact on your family in the future. 

Such planning, however, can be complex, and it is always best to consult the experts to ensure you make the most of all the opportunities out there. A Financial Planner will review your personal situation and come up with a tailored approach that best suits you. 

Make a will 

This may seem obvious, but many people fail to make a will, despite it being a crucial element of effective estate planning. With regard to inheritance tax, drawing up a will is particularly important if you have a spouse or civil partner. This is because there is no inheritance tax payable between the two of you if a will exists, but there could be tax payable if it does not, and assets are passed on to other relatives. 

Make the most of gifts and transfers 

By utilising gifts and transfers, you can considerably cut the taxman's take from your inheritance by reducing the value of your estate. This can be done in various ways, including: 

  • Gifts to your spouse or civil partner - Anything you leave to your wife, husband or civil partner will not be counted as part of your estate upon your death, provided you live in the UK
  • Cash gifts - Certain gifts given to family or friends can serve to reduce your estate's value, although there are various limits in place. For instance, there is a maximum limit of £3,000 in total gifts per year. However, there are some ways around this, including using the previous year's allowance if not already utilised, using a wedding allowance for a child or grandchild, or using a small gift allowance
  • Donations to charity - By leaving at least 10% of your estate to a charity when you die, you can reduce the amount that can be taken through inheritance tax 

In most cases, gifts made in excess of annual exemptions, allowances and to charity need to have been made at least seven years before they reduce the estate for tax purposes. 

Make use of trusts

There are many types of trusts available, in which assets can be placed and, as a result, will no longer form part of the estate. Setting up such a trust usually involves individuals, known as settlors, investing money into the trust, and the allocation of trustees, who ensure the investment is distributed according to the settlor's wishes upon their death. 

Keep records 

This may sound like common sense, but it is imperative you keep records of all such financial activities. For instance, if you make a gift or transfer, write down all of the relevant details - who you gave it to, how much, when you did it - and keep the information in a safe place. This is important because your executor will use the information to calculate your inheritance tax when you die. Therefore, be sure to let the executor know where the relevant documents are kept so they can be easily accessed in the event of your death. 


Put it off 

It can be all too easy to put off thinking about what will happen when you die. This may be due to apathy, or it may be because thinking about such matters frightens you. However, the reality is that we will all pass away, and none of us know when this is going to happen. We can't predict the future, but we can ensure our financial affairs are in order and that we are doing all we can to make sure we're not paying more inheritance tax than necessary. 

Allow your will to become out of date 

It is one thing drawing up your will in the first place, but it is quite another making sure it does not become out of date or ineffective. While some people may feel relieved to have sorted out this aspect of their finances, it would be erroneous of them to think they can now forget about it. Indeed, events in life can have a considerable effect on clauses in wills, such as if you are divorced but still leave your assets to 'your spouse', or if the assets you have bequeathed no longer exist. This could have a marked impact on your inheritance tax requirements. 

It is therefore very important that you review your existing wills and trusts, ensuring they remain fit for purpose. Returning to them every two years should help to keep them up to date. 

Draw the HMRC's attention 

With the right advice and careful inheritance tax planning, you will steer well clear of any danger of defrauding the HMRC. However, without expert guidance, mistakes can be made and investigations carried out. There are certain red flags that can draw the HMRC's attention to an executor because of their dealings with an estate, which are highlighted by the taxman. For example, the HMRC may be alerted if the value of an estate falls just below the inheritance tax threshold, or if valuations of property seem unrealistic. 

More information 

To find out more about how we can help you better prepare for this important aspect of your financial planning, head over to our inheritance tax planning section

Speaking to one of our advisers about your own personal situation could not be easier, simply call us on 0808 156 1176 or complete our online enquiry form and we will get back to you as soon as we can.