Inheritance tax planning: seven ways to look after your loved ones when you are gone

Paislei Godley, associate director at Prime Accountants Group, explains how a bit of inheritance tax planning now can go a long way to benefit your loved ones in the future.

Many people put off inheritance tax planning because they prefer not to think about their own mortality. But a little, regular inheritance tax planning could ensure that more of your hard-earned money will legitimately go to your loved ones rather than HMRC.

Inheritance tax planning will benefit people whose estate is worth more than £325,000. Under that figure, inheritance tax is not applied.  

If you give away your home to your children or grandchildren (including adopted, foster or stepchildren), then your threshold can increase to £500,000. 

Above these figures, you will pay 40% inheritance tax on your estate when you die.  

However, tax rules do offer you a number of practical options for inheritance tax planning that can put more of your estate into the hands of your spouse, family, friends and favourite good causes.  

Here is a selection of them. 

The first port of call for inheritance tax planning is to write a will. People often put this off, but it will make sure your estate is shared according to your wishes. If you die intestate (without a will) then it will purely come down to the letter of the law, and that may not be what you want.

As part of inheritance tax planning, HMRC gives you an allowance of £3,000 towards making a personal gift. This can also be rolled over if not used in a particular year, giving you an allowance of £6,000 for a gift in the second year.

When your children get married, you can give them £5,000 towards the cost of the wedding and this would be exempt for inheritance tax planning purposes.

If you have a lot of family members, you might like to give them up to £250 per year as a one-off gift. This would also be exempt for inheritance tax planning purposes.

You can gift a loved one any amount of money free from inheritance tax so long as you can demonstrate that it is in excess of your annual income and not part of the money you were planning to live on.

Not only is this a tax-efficient way to save while you are earning, you can also pass on your pension to a family member when you die and the money would be exempt from inheritance tax. Pensions typically go to a spouse, but the money can go to any beneficiary you decide to name.

Write a gift to a charity in your will and this money will be exempt from inheritance tax. You can also make a gift to a community amateur sports club.

These are a few practical options you can consider as part of your inheritance tax planning. They are simple enough to do, but the key is to keep good records about your financial affairs so you can demonstrate to HMRC where parts of your estate should be exempt.

At Prime Accountants Group, we sit down periodically with many of our clients to talk about their inheritance tax planning, put their affairs in order and make sure they are making the most of the money they would like to pass on to their loved ones.