The (only) legal way to avoid inheritance tax

As the saying goes, nothing in this world is certain, except death and taxes. Although this is true, there is a definite (and legal) way you can avoid the latter.

Inheritance tax (IHT) commands one of the highest tax rates in the UK, with assets in excess of £325,000 being taxed at a huge 40%. In the 2017-18 tax year, IHT receipts totalled £5.2 billion – an increase of 8% (£388 million) compared to 2016-17 []. With these numbers set to rise again in the following year, it’s critical for you as a business owner to know how to prepare your estate for if the worst were to happen.

When inheritance tax hits your loved ones, it comes at the most vulnerable point in their lives. It has a detrimental impact on their lives after your death, that you or they may not have expected. No-one wants to be the cause of even more stress in their time of need by forcing them to deal with the legalities of inheritance tax on your estate, especially since this trauma can be avoided with some simple planning.

Planning for your death may not seem essential at this point in time. But life is unpredictable, and you can never be too sure of what’s coming next. Preparing your estate as early as possible gives you the necessary time to provide your loved ones with the best outcome. It’s crucial to obtain the right information regarding your valued assets now, so that when the inevitable happens, your family have the security they deserve with no unexpected surprises.

First things first, what exactly is inheritance tax?

Inheritance tax is the tax placed on your valuable assets in the event of your death, after any debts you possessed have been paid back. These valued assets are known as your ‘estate’ and cover both personal and business related assets. Examples include property, land, cash, stocks, shares and valuables like jewellery.

The most obvious (and legal) way to avoid your estate being taxed is to stay under the £325,000 IHT threshold, but the ways you go about this can differ.

One way to overcome the inheritance tax trap is to distribute sums of money or shares of your business in trust funds for your loved ones. Although this does technically overcome IHT, after your death this money becomes liable to other forms of taxation, meaning this isn’t the most effective means of avoiding IHT. If you do choose to go down this route, be sure to seek professional advice prior to making any legal changes to your will.

How to avoid inheritance tax legally

The most effective way to avoid inheritance tax legally is to optimise your annual tax exemptions. Every year, you’re given an allowance of £3,000 to ‘gift’ to others tax free (among other gifts).

What is unknown to many people is that if you haven’t used your allowance in the previous tax year, it gets rolled over to the next, but only for one year – giving you a total allowance of £6,000. By using this annual tax exemption, you can slowly devalue your estate on paper, resulting in it falling under the IHT threshold.

You’re also able to  ‘gift’ people tax free in other ways. Wedding gifts, gifts to spouses or civil partners, charitable or political donations and gifts under £250 are all classified as tax-free and won’t be assessed as part of your estate. For the full terms regarding these gifts, be sure to speak to a legal advisor.

The seven-year rule

One key point to note: any ‘gifts’ larger than £3,000 are also potentially exempt from tax. They’re known as ‘potentially exempt transfers’ or PET. You’re allowed to hand out unlimited sums of your estate to other people, but this falls under the ‘seven-year rule’. Essentially, if you live longer than seven years after the PET gift was given, it automatically becomes tax-free.

However, if you die within seven years, the inheritance tax placed on this gift is levied on a sliding scale between 8-40% tax. This is one of the core reasons why organising your estate earlier on in your life is crucial.

So, there you have it, the most effective and legal way to avoid inheritance tax. Starting the process of preparing your estate is essential for those around you, so be sure to speak to one of our advisors, for more information and ways to start planning ahead today call 020 3745 7271 or email



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