Three ways to reduce your Inheritance Tax bill – and avoid family drama

Inheritance Tax (IHT) is often an unwelcome surprise for families, not least because this is due to be paid at a time when emotions are running high - which is a perfect recipe for family disagreements. So, I thought I would write down three pieces of advice to help reduce both your IHT bill and potential family disputes:

1. Limit surprises

In my experience, most family disagreements over inheritance stem from unexpected surprises. Open and honest discussions with your family and loved ones will give you all a chance to talk about any intentions for your estate and then make sure that your will includes those wishes. Transparency ensures that everyone understands their wishes, reducing the likelihood of disputes.

2. Use tax-free allowances while you’re alive

Don’t try to deliberately avoid the tax, because you are likely to end up getting your family into trouble. I worked with a family once where a mother had attempted to give away her portfolio of properties to her children, but it backfired, because when she died, one of her children was left with a £50,000 IHT bill and the other owed nothing. This was because of the way IHT was calculated – as the gift to one sibling had used up the £325,000 threshold, and  so the gift to the other child, above the IHT threshold , leaving  them to pay a large bill.

This could have easily been avoided. If one of the properties was the mother’s main residence, the £350,000 threshold would have been increased to £500,000. If she was married, and her spouse or civil partner had already passed away, she would benefit from their £500,000 allowance too, meaning the children would receive a £1 million IHT relief on their mother’s estate. For many, this means homes can be passed to direct descendants completely free from IHT - a potentially huge saving.

Also, taking advantage of gifting allowances to reduce the size of your taxable estate. Each tax year, you can give up to £3,000 without it being subject to IHT. You can also give unlimited smaller gifts of up to £250 to different people - as long as it does not affect your standard of living.

If you do give away larger gifts, of more than £3,000, be aware of the "seven-year rule," meaning they will only be free of IHT if you live for seven years after making the gift. Using these allowances effectively can make a significant difference in your IHT liability.

3. Agree to avoid costly delays

Disagreements while settling the estate only leads to delays - and mounting interest on unpaid IHT bills. For example, an unpaid £100,000 IHT bill from 2020 would have accrued £19,270 in interest over the four years it is left unpaid.

Some of the most common disputes usually arise over property. Some want to sell and liquidate the asset; some want to keep it. This is more common in holiday homes where some people may have no interest in using it, while others want to keep it for enjoyment, or as an investment for the future.

I recently read an article in The Sunday Times about another lawyer who spent two days putting post it notes on belongings around a house that his clients had inherited because they were arguing over its contents. Not only did this cost his client £3,000 in his time, it took more than 4 years for the families to come to an agreement - and it is only HMRC that benefits from those arguments. The less time spent disputing, the more your family can focus on preserving what matters most.

If you would like some more advice about planning for IHT, contact Downs Solicitors to see how we can help.