How to pay less inheritance tax

21 January 2015

Six ways to avoid leaving your children with a hefty inheritance tax bill.



1. Know the rules around giving away money

Any money you give away at least seven years before you die is exempt from inheritance tax. This may sound like a great way to cheat the tax office, but it comes with some caveats. For a start, there is a risk that you may live a lot longer than you may expect or encounter a problem and need access to the money.

Also, you can’t give money or assets away and continue to use them, so gifting your car to your son or daughter and continuing to drive it would not be possible. Likewise you couldn’t give your home away and continue to live in it.

The rules around giving are fairly complex, but it is possible for individuals to give away up to £3,000 each tax year without it being liable for inheritance tax. If you skip giving in one year, you can add the allowable amount forward and give £6,000 in the next tax year.

There are a few other ways you can give more than this annual sum, which are worth considering.

2. Give money as wedding gifts

If your child is getting married, you can gift them £5,000. You could give a grandchild or great-grandchild who’s getting married up to £2,500, or anyone else who’s getting hitched up to £1,000. Of course, they must go through with the marriage, otherwise there is no tax waiver.

Find out more about tax and giving gifts to your children.

3. Gifts if you’re a high earner

Wealthy people can also give away a proportion of their income, providing it doesn’t impact their lifestyle. So if, for example, your partner dies leaving you a sizable chunk of savings or money from cashed in investments, you could give some or all of this money away, as it would make no difference to your life.

4. Pay maintenance and support to your dependents

You are also allowed to make gifts to an ex-spouse or ex-civil partner for their maintenance, and to any relative, such as an elderly parent, who is financially dependent on you. It is permissible to gift your children if they are in full-time education and the money goes towards the cost of their education or their maintenance, which can include paying off their student loan.

Thinking about signing your property over to your children? Here's what you need to know.

5. Keep a record

There is no obligation to keep a record of gifts, but this can prove helpful following your death, as HMRC may want to un-pick what you gifted so it can clearly calculate your tax liability. Of course, if your estate is worth less than £325,000 (or £650,000 for couples) you can give away as much as you like because your executor will not face a tax bill.  

6. Donate to charity

The rate of inheritance tax is 40% on anything above the thresholds. Gifts to charities, museums, universities or community amateur sports clubs or political parties (provided the organisation meet specific criteria) are free of inheritance tax. If you gift more than 10% of your estate in this way, it is possible to reduce the inheritance tax rate from 40% to 36%.

Find out more about the positive tax implications of donating to charity. 

For more advice and guidance on planning for the future, Saga Financial Planning Service offers a no obligation review of your finances.

The opinions expressed are those of the author and are not held by Saga unless specifically stated.

The material is for general information only and does not constitute investment, tax, legal, medical or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.