Five Tips to Consider When Inheritance Tax Planning

Here are our FIVE inheritance tax planning tips to consider if you are wondering what will happen to your estate and how best to protect it from the tax man:

1. Gifts

You are entitled to give away gifts (money, property and possessions) throughout your life as you wish.  However some of these gifts will count towards the value of your estate when working out how much inheritance tax to pay to HMRC.

Small gifts are exempt and these are defined by HMRC as including Christmas presents, birthday presents, charitable donations, assistance for an elderly relative  and wedding or civil ceremony gifts of up to £1,000 per person (£2,500 for a grandchild or great-grandchild, £5,000 for a child).

In addition you can give away £3,000 worth of gifts every tax year without this affecting how your estate is valued for inheritance tax purposes. So you could consider how you would like your cash and possessions to be distributed and begin to utilise this annual exemption.  You are allowed to carry forward any unused exemption for one year, so if you haven’t done this yet you could be allowed to give away £6,000 this tax year.  Check with a tax advisor to confirm your exemption available.

2. The 7 Year Rule

Under this rule gifts made more than 7 years before you pass away do not count as part of your estate. So if a parent, for example, chooses to ‘gift’ their family home onto their children, it won’t be included in the value of the parents estate for inheritance tax purposes if the parent lives for more than 7 years after making the gift

If you pass away within 7 years inheritance tax will become due however the tax rate applicable will be reduced (‘tapered’) depending on the number of years since the gift was made as follows:

Less than 3 years 40%

3 – 4 years 32%

4 – 5 years 24%

5 – 6 years 16%

6 – 7 years 8%

7 or more 0%


3. Set up a Trust

Certain trusts can be set up which are useful for inheritance tax planning.  The assets (cash or property for example) you wish to place in the trust will officially no longer belong to you, and therefore would not be included in your estate for inheritance tax when the time comes.  There can be capital gains tax implications to setting up a trust and not all trusts avoid inheritance tax, so make sure you seek help from the right advisors if you fee this may be an option for you.

4. Charitable Donations

When you leave at least 10% of your estate to charity, inheritance tax is calculated on certain assets at 36% rather than 40%.  Whilst your loved ones may have a reduced inheritance, making a charitable donation is always helpful and the reduced rate of inheritance tax is a tax saving.

5. Life Insurance

Although this doesn’t actually reduce the inheritance tax that needs to be paid from your estate, taking out a life insurance policy could mean that your family receive a lump sum in cash to help settle the tax bill and avoid having to make difficult decisions like selling the family home. The insurance payout will form part of your estate for inheritance tax purposes so get the right advice and make sure the payout is made into a trust to avoid inheritance tax on this lump sum.

If you are considering your options to avoid or reduce inheritance tax on your estate, we recommend always speaking to a Tax Advisor who will make sure you take the right steps to finding the right tax plan for your situation.

Anita Forrest
About Anita Forrest

Anita Forrest is a Chartered Accountant, spreadsheet geek, money nerd and creator of - the UK small business finance blog for the self-employed community. Here she shares simple, straight-forward guides to make self-employment topics like taxes, bookkeeping and banking easy to understand.