The value of your home has probably increased since you bought it. With house price increases reaching record levels in the last few years, many properties are now valued at more than the Inheritance Tax (IHT) threshold of £325,000. Given that IHT is charged at 40% of the balance of your estate over £325,000, it makes sense to take steps to reduce or eliminate IHT.

There is no Inheritance Tax for transfers between spouses or civil partners

It is important to understand that there is no IHT on any estate transferred to your spouse or civil partner. That means it you leave your entire estate to your spouse or civil partner, your estate will not be subject to IHT. However, if you do not have a spouse or civil partner, this relief will not be available to you.

It is also important to understand that by leaving your entire estate to your spouse or civil partner, you might simply be stoking up an IHT bill for their estate when they pass away. 

Additional allowance when passing your house to children and grandchildren

There is an additional IHT allowance when you leave your house or share in your house to your children or grandchildren. This provides an additional allowance of £175,000. In theory, this means that you have an allowance of £500,000 available if you decide to transfer your house to your children or grandchildren. 

There are two issues with this. First, if your house or share in your house is not worth £500,000, you can only benefit to the extent of the value of your share. Secondly, if your share in the house is more than £500,000, then your allowance will be restricted to £500,000.

Accordingly, with careful estate and Inheritance Tax planning, you can reduce or eliminate the Inheritance Tax your estate will have to pay. 

Gifting all or part of your estate

When you gift all or part of your estate, it may then be outside the reach of IHT charges after a period of time. Sometimes known as the 7-year rule, if you make a gift and survive for seven years, in certain circumstances, the value of the gift may be excluded from your estate. 

However, if you make a gift but continue to enjoy some benefit from it, it might still be included in the value of your estate.

Annual and other gifts

You can make an annual gift of up to £3,000 and that amount will be excluded from your estate. You can also make as many gifts of £250 as you wish and that will also be excluded from your estate.

If you have a child who is getting married, you can gift them up to £5,000, you can make a wedding gift of £2,500 to a grandchild and £1,000 to anyone else on their wedding. All these payments will be excluded from the value of your estate for IHT purposes.

Gifting to Charities

The value of any gifts you make to a registered charity or community sports club will be excluded from your estate for IHT purposes. In addition, should you gift 10% or more of your estate to charity or community sports clubs, the rate of IHT payable on your net estate will be reduced from 40% to 36%. This can be very effective in large estates.

Plan early to reduce or eliminate Inheritance Tax

If your estate is likely to be exposed to IHT it is best to plan early. The earlier you commence planning, the more effective your plans are likely to be.

Experienced succession planning solicitors in North Berwick and Dunbar, East Lothian

Our solicitors have years of experience advising clients on all aspects of succession planning in North Berwick, Dunbar and across the Lothians and Scotland.

Contact us to discuss how you might mitigate or eliminate Inheritance Tax. Help your loved ones to retain more of your hard-won assets, property and investments though effective Inheritance Tax planning.