The estate covers the property, money and possessions of a person who has died. Should the value of the estate exceed a threshold – currently £325,000 – then it may be that Inheritance Tax needs to be paid.
There are ways in which a person may be able to increase their threshold – such as by giving their home to their children or grandchildren.
In doing this, currently, the giver can increase their threshold to £500,000.
People who are married or in a civil partnership and whose estate is worth less than their threshold can have any unused threshold transferred to the surviving partner’s when they die.
As such, the partner’s threshold can now reach as much as £1million.
Some people may want to look for ways to reduce an IHT bill on their estate, and there are ways of doing this, as Jonathon Scott, Tax Partner at Haines Watts, explained.
Speaking to Express.co.uk, Mr Scott said: “Certain gifts made during your lifetime are exempt from IHT, these include those to a spouse, wedding gifts, and regular gifts out of income.
“By donating 10 percent of your death estate to charity, you can also reduce the overall percentage of tax charged on your death whilst giving money to a good cause.
“As a general rule, most gifts made more than seven years before death will escape tax.”
However, should the gifts have been given within seven years of death, Inheritance Tax may apply at a taper rate – something which people may want to consider in their tax planning.
This is what’s known as the seven-year rule, and if it was given within three years of death, the tax must be paid at the 40 percent rate.
There are a number of other ways to reduce an IHT bill, Mr Scott said.
These include SEIS/EIS investments. He said: “Alongside the significant Inheritance Tax advantages, investment in EIS shares also confer a number of other reliefs.”
Paying into a pension may also be an option.
“Pensions can fall outside of your estate upon death,” Mr Scott said.
“In order for them to fall outside of your estate the pension must remain untouched with no funds removed.”
What are some other options?
“Shares held in unquoted trading companies are free from Inheritance Tax once held for two years,” said Mr Scott. “This can provide a low risk Inheritance Tax planning strategy, with the potential for commercial return.
“Life insurance to spread the cost of IHT and these can be arranged by your financial planner.”
Lifetime transfers and gifts was another aspect he raised.
“Up to £3,000 may be given by an individual without an IHT charge, and this allowance can be carried forward for one year,” the tax partner said.
“On top of your £3,000 allowance, small gifts not exceeding £250 per tax year per recipient are exempt.
“You can make a gift of £250 to any number of people in any given year. Wedding gifts up to the value of £5,000 may be made by a parent, with lower limits for others (£2,500 for grandparents and £1,000 for others).”