04 January, 2010
There are a number of ways in which you can reduce your Inheritance Tax, and by incorporating them into your lifetime estate planning you can potentially substantially reduce your Inheritance Tax liability upon death.
1) Make sure you use your annual allowance
Everyone is entitled to give away up to £3,000 per tax year free of Inheritance Tax. If you did not make use of the exemption in the previous tax year then this can be carried forward, but only for one year.
2) Small gifts exemption
The small gifts limit is £250 and there is no limit to the number of £250 gifts which can be made by a person in any one tax year. However, each gift has to be to a different person and they cannot by used in conjunction with the £3,000 annual allowance.
3) Normal Expenditure out of Income
This is a very useful tax planning tool which if done properly can save thousands of pounds of Inheritance Tax. The donor should never put their usual standard of living in doubt by making gifts and they should keep clear records of the regularity of the payments as evidence demonstrating that the gifts themselves did come from income received. There is potentially no limit as to how much can be gifted under this heading, which is why it should be considered as an essential method of estate planning.
4) Potentially Exempt Gifts
Any gift under your unused Nil Rate Band limit (the current level is £325,000) will be Inheritance Tax free when the gift is made and will be completely removed from your estate provided that you receive no benefit from the gift property once it has been made and survive 7 years after the gift has been made.
5) Spouse/civil partner exemption
There is no limit to the amount that you can give to your spouse or civil partner provided that they are domiciled in the UK. Couples in a long term stable relationship should therefore give serious consideration to formalising their relationship by marriage or a civil ceremony. Following the introduction of the Transferable Nil Rate Band in October 2007 this advice should be considered with more significance.