How to... minimise inheritance tax

WHERE THERE’S A WILL

Making a will ensures that the estate is distributed in the most tax-efficient way and according to the testator’s wishes, rather than being governed by the rules of intestacy, which apply when someone dies without a will.

REGULAR EXEMPTIONS

Everyone has an annual allowance, which allows them to gift up to £3,000 to a relative or friend exempt from IHT. If in any year this allowance is not fully utilised, it can be carried forward for one year. Up to £250 can also be given to any number of individuals annually without being assessed for IHT.

Those with a comfortable level of income can take advantage of the “normal expenditure out of income” exemption. There is no limit on the amount of the gift as long as it is made from excess income, is regular and does not reduce the donor’s standard of living. It is essential that such gifts are recorded fully.

WEDDINGS AND FUNERALS

A gift allowance of £5,000 is available to a parent (£2,500 to a grandparent) to make to their child or grandchild in consideration of their marriage or civil partnership. Any gift made to an individual more than seven years before the donor’s death (as long as no right to benefit is retained from the gift) falls outside the donor’s estate and, therefore, is not liable to IHT. Financial circumstances change over time, so such gifts should only be considered if affordable.

STRUCTURE YOUR ESTATE

Life policies should be written in trust to prevent the proceeds forming part of the taxable estate on death. In a typical year, about 4 per cent of IHT paid on death relates to life insurance policies not written in this way. This tax charge could have been avoided.

SPEND ON YOURSELF … OR GIVE IT TO CHARITY

If the idea of having a large IHT bill is uncomfortable, there is a no more enjoyable way to reduce what goes to the taxman than to spend the money. And the bill can be reduced further by leaving some of what’s left to charity.

• Angela McMahon is a senior solicitor at Murray Beith Murray