How To Avoid Inheritance Tax

After someone dies, their estate (property, belongings, and money) will go to the beneficiaries named in their will. If all of that is worth more than £325,000, the beneficiaries must pay inheritance taxes on the assets they inherit. Nothing needs to be paid if it’s less than that though.

For those who leave behind large estates for their loved ones, it’s important to know how inheritance tax can be avoided once they die. And yes, there is a way! In this article, we answer the frequently asked questions about inheritance tax and explain how it can be avoided.

In this article:

What Is Inheritance Tax?

Inheritance tax is levied against any estate with a value above £325,000. Once assets exceed that amount, everything will taxed at 40%. For example, if your assets come to a total of £850,000, the first £325,000 of that is no† taxable. It sits in something called a ‘nil-rate band’. As for the remaining £525,000, you will need to pay 40% tax on this.

Inheritance taxes must be paid within six months after the person’s passing – which can come with its problems – but it must be done as soon as possible to avoid issues further down the line.

Understandably, you want to send as much of your estate to your beneficiaries as possible, and tax-free if possible. There are a few loopholes, all of which will be explained.

What are the most common problems with inheritance tax?

The first six months after someone’s passing is the window in which inheritance tax must be paid. However, it isn’t always so straightforward. Without a will, loved ones will need to apply for probate. Typically probate applications take between 6 – 12 months, therefore if the application isn’t approved in time people may need to make quite big decisions. This could mean selling homes for cash to ensure they have enough money to cover the inheritance tax costs. As a reputable cash property buyer, Good Move can help in this instance, providing a stress-free, efficient service meaning your loved ones have one less thing to worry about at an already difficult time.

Also, when a loved one has passed away, it’s unlikely that someone’s top priority is going to be working out how much inheritance tax they owe. Everyone operates differently at this time of their life and people work at their own timescales. Funerals need to be arranged; wills need to be located and open accounts need to be settled. All of this can contribute to a delay in that six-month window, so it’s important that you know how to buy yourself some more time or see if all of this can be avoided.

How to avoid paying tax on inherited property

Leaving Assets to Children and Grandchildren

There is something called a ‘main residence nil-rate’ band that works in the favour of those who inherit property. As for 2024/25 that figure currently is at £175,000 which means if your home is worth less than that, it can be passed onto children or grandchildren entirely tax-free.

For homes that cost more than that amount, £175,000 will be deducted from the final price, saving a considerable amount of taxable money. For example, for a home valued at £500,000, £325,000 of that will be passed onto the named people in the will. For these rules to apply, it must be your primary home of residence, not a holiday home or rental property. It also cannot be any other relative other than a child or grandchild, otherwise, inheritance taxes will apply.

Equity Release

Having an equity release scheme allows people to reduce the overall value of their home. This can be done either with a lifetime mortgage or a home revision plan.

A lifetime mortgage allows you to borrow part of the value of your home with a fixed interest amount. For example, for a home valued at £575,000, you can take small amounts (up to 27% of the property’s value) to make gifts to various people. For beneficiaries who inherit a home with a lifetime mortgage, once the mortgage is repaid, anything left over will be paid to them. If no equity remains, then nothing will be paid.

A home reversion plan means part of a home is sold to a home reversion provider and they either give you a lump sum or make regular payments to you in exchange. You’re allowed to live in the property completely rent-free, but it must be maintained and insured while you live there. The overall amount you get is equal to around 50% of the property’s value. The home reversion provider then gets to sell the home once the homeowner has passed away.

Gifting

By giving beneficiaries significant gifts while you’re still alive you avoid the size of the estate that can be taxed. The law says people can gift loved ones up to £3,000 a year completely tax-free. Parents can also give children up to £5,000 as a wedding gift and grandparents can give their grandchildren up to £2,500 as a gift. By gifting to loved ones regularly, they can add this money to a savings account, without any worry about having to pay taxes.

One thing to be aware of though; if you die seven years after you’ve made a large gift transfer, the person won’t have to pay any inheritance taxes on the amount. If you die before that, the gift recipient will have to pay inheritance taxes on the amount gifted.

Fun fact: All gifts to charities and political parties are exempt from inheritance tax. If more than 10% of assets are dedicated to charity in a will, it can reduce the overall inheritance tax expected to pay.

Gifting a pension is also a good idea. These are completely free from inheritance taxes if you die before the age of 75. If you die after that, they’re taxed but at a much smaller rate – typically just 20%.

Outside of those kinds of gifts, there’s another solution to the question “how much can I give away to avoid inheritance tax.” You may give absolutely anyone £250 at any point in time, but you can only give one of those per person.

Life insurance and inheritance tax

An excellent way to reduce the impact of inheritance tax on your estate is with life insurance. Some firms market life insurance policies specifically designed to pay inheritance tax bills, so it’s always best to do thorough research. This can mean your assets remain intact and nothing has to be sold to pay any inheritance taxes. One of the terms and conditions to be aware of though is that
the policy is paid into a trust or the payment from the policy becomes part of your overall estate.

Trusts tend to be a way to put assets outside of your estate but they can only be set up through an independent financial advisor, as the rules are quite complicated.

Best advice for property inheritance

One of the best options when organising what happens with your estate once you die is to work with a solicitor who specialises in estate planning. They will be able to guide you through the process and find the best option for you and your beneficiaries. By carefully planning your estate, your beneficiaries can get as many of your assets from your estate as possible without the need to pay hefty inheritance tax fees on top of the taxes you’ve already paid.

For those who have recently inherited a property and wish to speak to a qualified and experienced team about the next steps of selling, contact Good Move today. Our team will happily help you figure out your next steps while outlining how our thorough yet streamlined process works to help you sell the property fast.

We aim to offer you a cash offer within 24 hours and sell the property within just two weeks, giving you peace of mind to handle bigger topics such as inheritance tax.

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