Give it away regularly
You can reduce the impact of inheritance tax by making small gifts of money, says Paul Lewis.
One of the good things about inheritance tax – yes, really! – is that you can reduce its impact by doing nice things, such as giving money to people you love. Every year you can offer certain amounts without them coming into the inheritance tax arithmetic when you die. One of the lesser-known tax-free gifts is money from surplus income.
Of course, many of us have no spare income. But if you do, then giving some of it away regularly can be a good way to reduce the effects of inheritance tax.
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The rules state that the money you give must come out of your income – so it doesn’t apply to gifts you might make out of your savings. They count as capital and mustn’t be more than £3,000 a year in total, although you can make small gifts of up to £250 each to any number of people.
Gifts out of income can be made to any amount as long as they do not reduce your lifestyle. Normally, they will be regular payments, say every month – note that they do not all have to be to the same person. As we get older, we tend to do less and lead more restricted lives. So if you’re in your 80s or 90s, your income may be more than enough to sustain the lifestyle that suits you. Someone who is widowed and has inherited a good pension from their late spouse might find they do not need it all, especially if they spend less now they’re alone.
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Any gifts to reduce inheritance tax come with two important warnings. First, never give away money you need to spend on yourself. Second, each year inheritance tax is only paid by about the wealthiest one in 20 of those who die – so there is a 95 per cent chance it won’t affect your heirs anyway. But if it will, then giving money out of your income is a good way to reduce its impact.
You should also consider the people who sort out your will and financial affairs by making a note of regular gifts – how much you give and to whom – and state that you can manage perfectly well on the income that is left.