Inheritance tax tips: How to gift to your loved ones without incurring a high bill

Inheritance tax explained by Interactive Investor expert

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Emma Watson, Head of Financial Planning & Advisory Services at Rathbone Investment Management, spoke exclusively to to provide Britons with the information they need to give to their loved ones and charity without incurring a high inheritance tax (IHT) bill.

Keep below the inheritance tax threshold

She explained: “The nil-rate band, which is not technically an exemption, means that the first £325,000 of chargeable transfers are taxed at nil percent, so are effectively tax free.

“Anything over the £325,000 limit can incur inheritance tax, which is 40 percent.

“However, if you leave everything over this limit to your spouse, civil partner, or a charity, then you can save on any potential IHT bill.”

Gift to charity

Anything left to charity is free of inheritance tax, so this could be worth considering as a way to reduce an IHT bill, while also benefiting a good cause.

Ms Watson added: “If 10 percent of your net estate is left to charity the rate of inheritance tax applicable on death is reduced to 36 percent from 40 percent, meaning the taxman would take a smaller cut of your estate.”

Give assets away

“Everyone can gift up to £3,000 a year with no inheritance tax implications, irrespective of when you pass away,” Ms Watson said.

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“If you haven’t made gifts in the previous year then you can use that £3,000 too.

“Certain family members can also make gifts to a relative who is getting married or entering a civil partnership so it’s worth being aware of these exemptions.”

However, Britons should be aware that giving more sizable amounts could lead to a tax charge if the person gifting the sum were to die within seven years.

If they survive for seven years though, then the gifts will usually be free of tax.

Put assets in a trust

Ms Watson explained: “Putting assets, such as cash, property, or investments, into a trust can mean they’re no longer part of your estate for inheritance tax purposes.

“However, the rules around trusts are complicated and have changed over the years

“For example, you could be taxed as you pay in or take money out, so make sure to seek advice if you’re considering this option.”

Take out life insurance

An alternative way to reduce some of the costs associated with IHT could be taking out a life insurance policy.

Ms Watson said: “Though it will not reduce the amount of inheritance tax due on your estate, the payout could help your surviving family pay the bill swiftly and without using passed on wealth to cover the tax.

“If the policy is placed in a trust, the insured amount will usually be paid outside of your estate and therefore free from tax.”

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