Inheritance Tax Planning

Reducing Inheritance Tax

KLOFinancial |

Thanks to rising house prices, many people have found themselves in a situation where they possess an unexpectedly large estate. This may raise worries that loved ones will be hit with a large inheritance tax bill after the owner passes away.

How much tax will my children have to pay?

Depending on your situation, heirs will pay tax at 40% on anything they inherit that falls above the personal inheritance tax free allowance. This is also called a “nil-rate band”. This allowance is currently at £325,000 for an individual.

Married couples and civil partners are allowed to pass their estate to their spouse tax-free when they die, as well as any unused inheritance tax allowance, meaning they can pass potentially pass up  to £650,000 to their children on second death.

A new rule was introduced in April, which allows you to pass on an extra £100,000 to your children, provided that your estate includes your main home. This new allowance – called the “residence nil-rate band”, is to rise by £25,000 every year until it reaches £175,000 in 2020.

What options are there to reduce a potential inheritance tax liability?

Property prices may not follow the same pattern that they have in the past 10 years, meaning it’s extremely difficult to predict what a home will be worth when the children are to inherit the property.

There are various different ways you can go about potentially reducing future inheritance tax bills. One way is to reduce the size of your estate to below your total inheritance tax allowance by gifting your money into trust or utilising other investment options such as Business Property Relief and Enterprise Investment Scheme products. All of these offer different benefits in mitigating inheritance tax. Alternatively, you may wish to downsize to a cheaper property, giving money to your children now instead of later. This means that your children will still benefit from the residence nil-rate band that applied to your previous home.

As a result of this, you are also allowed to give away as much as you like tax free as long as you live for at least seven years after making this gift. This is known as a “potentially exempt transfer”. Other than that, you are also entitled to give away up to £3,000 a year tax-free.

However, as well as these, there are a number of other options available, such as releasing equity from your property.

Get in touch

If you’d like to discuss reducing inheritance tax for your loved ones, talk to one of our financial advisers. Please call on 01926 492406 or email us at to make an appointment.