How can I reduce Inheritance Tax liability for my kids?

Old female hands on paper note writing a testament document

Ask the expert at Smith & Pinching about reducing Inheritance Tax (IHT) liability - Credit: Getty Images/iStockphoto

I’m worried that my children may have to pay Inheritance Tax when I die. I’m single and my house is worth more than the exemption of £325,000, plus I have a number of ISAs and other investments. I think my total estate will be worth about £600,000. What can I do to reduce the tax?

Douglas Bridges is an Independent Financial Adviser with Smith & Pinching

Douglas Bridges is an Independent Financial Adviser with Smith & Pinching - Credit: Smith & Pinching

Douglas Bridges of Smith & Pinching responds:

There are two points I need to make in response to this. Firstly, you are right that your Inheritance Tax (IHT) exemption – known as the Nil Rate Band (NRB) – is £325,000. However, there is an additional slice of IHT exemption that can be applied if you are leaving your home to your direct descendants – children, grandchildren and stepchildren, including adopted or fostered children. This allowance, known as the Residence Nil Rate Band (RNRB), gives you up to £175,000 extra exemption, so you potentially have a total exemption of up to £500,000.

Unused NRB/RNRB can be passed between spouses or civil partners but if you are single (not widowed) you only have your own exemptions to consider. The RNRB is reduced on a tapered basis for those with estates worth more than £2 million. Therefore, if your estate is worth £600,000 on your death, there will still be a significant IHT bill to be paid on the £100,000 over the exemption. IHT currently stands at 40pc.

The second point I wanted to make is that IHT can indeed be managed by a number of different strategies. You could, for example, make lifetime gifts to your children to reduce the value of your estate. Chargeable gifts aren’t considered outside your estate until seven years have elapsed since the gift was made but there are various IHT-exempt gift allowances you can use. Gift allowances include a total of £3,000 per tax year (6 April to 5 April) plus special allowances for wedding gifts and gifts to charities. In addition, you can give up to £250 per tax year to anyone, provided they haven’t received other gifts from you in the tax year.

There are other strategies that may be of benefit in reducing your estate, but we would need to look at your specific circumstances to see if they are suitable. These could include pension contributions and perhaps the use of trusts. It is essential to get advice before using trusts.

I strongly recommend that you talk to an Independent Financial Adviser to work out a suitable IHT mitigation strategy. There is much that can be done and you should start the process as soon as possible. 

Any opinions expressed in this article do not constitute advice.

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