Inheritance tax (IHT) can be a significant concern for many families across the UK. To help people navigate this complex area, Aatos, a leading legal tech firm in the Nordics, is pleased to unveil a detailed guide on reducing inheritance tax liabilities.
Inheritance tax (IHT) in the UK is a tax on the estate (property, money, and possessions) of someone who has died. The standard IHT rate is 40%, which is charged on the part of the estate that exceeds the £325,000 threshold.
However, there are various reliefs and exemptions available, such as gifts, charitable donations, trusts and Last Wills, that can help reduce the IHT liability.
“Many wealthy people use these strategies all the time. By planning their estate in advance, the average person can also achieve significant savings,” says Catrin Le Rendu, a solicitor at Aatos.
Money-Saving Tips
| Category | Details |
|---|---|
| Annual Exemption for Gifts | Give away up to £3,000 worth of gifts each tax year. |
| Gifts for weddings or civil partnerships | Parents can give up to £5,000, grandparents and great-grandparents £2,500, and anyone else up to £1,000. |
| Potentially Exempt Transfers (PETs) | Gifts given more than seven years before death typically escape IHT. |
| Life Insurance | You can ensure that life insurance payouts are kept outside your estate to avoid increasing IHT, by putting your life insurance in trust. |
| Charity Donations | Donations to registered charities are IHT-exempt and can lower the taxable value of your estate. By leaving at least 10% of your estate to charity, you can reduce the IHT rate on the remaining estate from 40% to 36%. |
| Creating a tax-efficient Will | As of the 2024/25 tax year, the nil-rate band is set at £325,000. For married couples or civil partners, their combined nil-rate band can be doubled to £650,000 (assuming the estate is left to the surviving spouse/partner). For the 2024/25 tax year, the Residence Nil-Rate Band allows an additional £175,000 to be passed on tax-free when a main residence is left to direct descendants (children, grandchildren, etc.). |
“If the estate is planned well ahead, it means that people can potentially pass on up to £500,000 tax-free if they meet the criteria for the Residence Nil-Rate Band. For married couples or civil partners, this can increase to £1 million,” Le Rendu explains.
If you want to keep more of your wealth in the family instead of losing it to inheritance taxes, ultimately the winning approach is simple: Give gifts now and have an effective Last Will in place.
"Giving away money while you're still alive shrinks the value of your estate. But the real magic happens when you combine that with a Will that maximises tax allowances and uses trusts to your advantage", Le Rendu says.
Think of it this way – gifting allows you to share your good fortune today and chip away at that future inheritance tax bill. But unless you've got a strategic Will in your corner, you're still leaving a lot on the table for the taxman.
Contact
Catrin Le Rendu
UK Solicitor
catrin@aatos.app
Mariia Kukkakorpi
Communications Manager
mariia@aatos.app
Aatos is a leading digital legal service in the Nordics providing comprehensive, affordable legal solutions across Finland, Sweden, Denmark, and the United Kingdom. Aatos specialises in personal legal documents and advice, making legal services accessible and understandable for everyone. Aatos’s services include e.g. drafting Last Wills, Prenups and Lasting Power of Attorneys.
