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Some Ways to Reduce Your IHT liability

We are unable to avoid paying Inheritance Tax, however, it is possible to reduce your IHT Liability by making use of certain tax planning tools. One extremely effective way of reducing your exposure to IHT is by making gifts during your lifetime.

The current Inheritance Tax situation allows for each person to have a Nil Rate Band (Tax Free Allowance) of £325,000. Any assets up to the value of £325,000 will be taxed at a rate of 0% and anything over the allowance will be charged at a rate of 40%.

We are unable to avoid paying Inheritance Tax, however, it is possible to reduce your IHT Liability by making use of certain tax planning tools. One extremely effective way of reducing your exposure to IHT is by making gifts during your lifetime.

When lifetime gifts are made, they will be outside the estate for IHT purposes provided the transferor survives a period 7 years from making the gift. However, there are certain exemptions available which allow for gifts to be made, without having to meet such conditions. There are stated below:

Annual Exemptions

Transfers made in any one tax year are exempt to the extent that they do not exceed £3,000, any excess would become chargeable. If the full £3,000 exemption is not used in one tax year, the unused balance can be transferred over to be used in the following tax year but not for further tax years.

Small gifts

The transfer or can make any number of gifts to any number of donees provided the value, to each donee, does not exceed £250. If the £250 limit is exceeded, the full amount gifted would become chargeable unless it qualifies for a different exemption.

Normal expenditure out of income

A transfer is exempt to the extent that it is made out of the transferor’s normal expenditure. The payments must be made out of the transferor’s income and after doing so, the transferor must still have sufficient income to maintain their usual standard of living.

Gifts in consideration of marriage/civil partnership

This exemption covers gifts to a party of a marriage/civil partnership. The value of the exemption will depends on the relationship between the transferor and the party to the marriage/civil partnership. If the allowable limit is exceeded then the excess will be chargeable.

The appropriate limits are:

  • £5, 000 for gifts made by a parent of a party to the marriage/civil partnership

  • £2, 500 for gifts made by more remote relations

  • £1, 000 for all other cases