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Top Tips For Cutting Your Inheritance Tax Liability

By: J.A.J Aaronson - Updated: 5 Oct 2012 | comments*Discuss
Inheritance Tax Liability Liabilities

Inheritance tax (also known as IHT) can be one of the greatest financial worries that an individual can endure, but it is also one of the money problems to which people give the least thought. This could well be because of the apparently high threshold below which estates are not liable for the tax.

However, with rising property prices, an increasing number of people are being caught by surprise and saddled with potentially huge tax bills. There are a number of ways in which you can cut your inheritance tax liability, but it is important that you act now.


Before you embark on any program of Inheritance Tax Liability limitation, it is worth working out whether or not IHT will actually affect you. In order to do this, you should add up all of your taxable assets – these include any property that you own, along with savings and any personal possessions. Certain personal effects are not liable for IHT; these are covered in an article elsewhere on this site.

You should also bear in mind that, although ISAs and PEPs are not taxable during the lifetime of the holder, the assets included in these are liable for inheritance tax. If the total value of your taxable assets exceeds the Nil-Rate Band, currently set at £325,000, then you should be taking action to minimise your IHT liability.

One of the most important steps that you can take to do this is to Write A Will. This is a wise course of action regardless of the value of your estate, but if you have an inheritance tax liability it can prove vital. Stipulating who you wish to inherit which part of your estate can ensure that you do not place your assets at the mercy of intestacy laws which are, by definition, written to benefit the Exchequer. Furthermore, instruments such as trusts, which are covered later in this article, may only be valid if they are established in a will.

Reducing the Estate

One of the most basic ways in which you can limit your liability is to reduce the total size of your estate. There are numerous ways of doing this. As they get older, many individuals choose to give gifts to family and friends rather than writing them into their will. This has the dual effect of allowing the giver to see the benefit of the gift, and also of gradually reducing the estate. Currently individuals may give away up to £3,000 per year without incurring any IHT, and this is therefore a popular way of minimising your liability.

Furthermore, although it may seem drastic, you may wish to think about moving home in order to reduce the size of your property assets. If this is too big a step, you may also consider embarking on an equity release scheme. This will free up some immediate cash, which may be vital in retirement, and will again reduce the size of your estate.

Trust Funds

An increasing number of individuals are turning towards trusts as an effective way of limiting their tax liabilities. Using a discretionary trust you can pass portions of your assets on to trust holders, who are legally charged with looking after them until your death. At this point they will be passed on to your intended beneficiary. This can be an excellent way of pre-empting IHT but of also retaining your ability to determine who benefits from your estate.


Trusts can also be used in order to ensure that the maximum benefit is taken from your Nil-Rate Band. Many married couples choose simply to pass their estate on to their spouse but, while this is an understandable choice, it is often not the most tax-efficient course of action. Rather, you may wish to consider placing assets above your Nil-Rate Band into a trust which is passed to your children, but only after the death of your spouse. This ensures that both your own and your spouse’s Nil-Rate Bands are used effectively, as any transfers between spouses are exempt from tax. If you are interested in this course of action, you should consult a professional.

Finally, it should be remembered that IHT rules favour those who are married or are in a civil partnership. Currently, co-habiting couples who are not married will not qualify for the exemption granted those who have legally codified their relationship. Unfortunately, the only way to gain this exemption is by marrying or entering a civil partnership, and this may therefore be an option you may wish to consider.

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