Benjamin Franklin has famously been credited with the saying that there’s only two things certain in life: death and taxes. Unfortunately, Inheritance Tax (IHT) covers both. The rules keep being updated but, put simply, when you die, the net value of your estate will be subject to a flat rate of 40% IHT on anything above the nil rate threshold of £325,000.

With rising property prices, an increasing number of families are being affected by IHT, which can run into the hundreds of thousands of pounds. Last year, IHT revenue topped £3.1 billion, and yet it is perfectly possible to avoid huge swathes of IHT, or even pay none at all. Nothing fishy about this – all it takes is a bit of clever financial planning.

Inheritance Tax (IHT)

Here are 8 tips to help you minimise your IHT liability.

1. Make a Will

Writing a Will should be the cornerstone of your estate planning. If there is no Will, intestacy rules will apply, meaning the law effectively decides what happens to your estate. For those who aren’t married and don’t have children, the estate would pass to their parents, potentially increasing their IHT exposure. Making a Will not only ensures that your assets are passed to your chosen beneficiaries according to your wishes, it will also give you the opportunity to make provisions in the most tax efficient way.

2. Take out life insurance

One of the easiest ways to provide funds for paying IHT is to take out a whole-of-life insurance policy for a sum equal to that of the tax liability. Make sure the policy is written in trust for your beneficiaries, so that the death benefit will pay out immediately and without having to go through probate.

3. Use your annual exempted gift allowance

You can gift up to £3,000 per year tax free, plus small gifts up to £250 per person. In addition, there are exemptions for wedding gifts, gifts out of income, gifts to charities or political parties, and gifts to help looking after another person. There’s no IHT to pay on gifts between spouses as long as their permanently UK resident. For all other gifts, the 7 year rule applies for ‘potentially exempt transfers’.

4. Make use of trusts

Assets placed in a ‘bare’ trust, where the beneficiaries are absolutely entitled to the assets within the trust as well as any income generated from these assets, are considered as a potentially exempt transfer. Discretionary trusts are limited to the nil band rate unless you’re happy to incur an immediate lifetime transfer tax of 20%, plus a possible additional 20% if the person making the gift dies within 7 years.

5. Consider Business Property Relief

If you invest in assets that attract business property relief, such as those listed on the AIM, these will be exempt from IHT after only 2 years. Due to the volatile nature of these shares, careful financial planning advice is highly recommended. If you’re a business owner (sole trader, partnership or unquoted trading company), you should find out if your business qualifies for 100% business property relief.

British Poundsterling

6. Investigate equity release options

Rather than gifting your capital, you could use an equity release plan to free up some of the equity in your property and gift it to others in excess of the standard allowances (subject to the 7 year rule). That way, your IHT liability would be reduced while funds can be made available for your nearest and dearest during your lifetime. Equity release is a complex topic and should be carefully explored with the help of an equity release specialist.

7. Consider purchasing farmland

Farmland qualifies for agricultural property relief of up to 100% after 2 years of ownership. However, in order to take advantage of the relief, you would have to ensure that the land complies with the legislation, meaning you would need to be actively working the land as a commercial business.

8. Make charity donations

Charity gifts are exempt from IHT. But did you know that if you donate 10% of your net estate to charity, the rest of your estate will only be charged at 36% instead of the usual 40%? It’s worth considering this allowance if you’re thinking of making charity gifts in your Will.