Inheritance tax

After being taxed throughout your life, you may also be taxed when you die. If your estate is over £275,000 in value then, it will have 40% inheritance tax (IHT) applied to the excess before you can leave it to your children or grandchildren. This tax only used to affect the particularly rich, but recent house price increases have meant that the allowance hardly covers an average house in the South-East.

There are ways to reduce the impact of the tax though – for instance if you are married, you may have a will that leaves everything to your spouse when you die. Since spouses do not have to pay IHT at all, you may think this is a good idea, but you are really just wasting you IHT allowance. When your spouse also dies and leaves the estate to your children, IHT tax will then have to be paid and there will only be one person’s allowance to cover the estate – if you had left a large portion to your children when you died, you could have used your allowance too.

You can also avoid IHT be giving away your assets to family members as gifts, as long as they are given more than seven years before you die. If you die within seven years, the amount of IHT liable increases up to the maximum if you die within three years of giving the gift.

The other way to reduce the impact of IHT is to put your money into trusts aimed at reducing IHT. With a trust you can also decide how the recipient will gain from the investment – for instance you could leave money in a trust to a grandchild that they could not access until they are 21 when they should be more responsible. Once you put money in a trust though, you cannot easily get the money back, so always make sure you think about it thoroughly and always speak to a qualified professional.