Important information - the value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

Despite rumours of a big offering on Inheritance Tax (IHT), neither of the major political parties has committed to altering death duties if they win the General Election.

The only promised change has come from a minor party - Reform - which has pledged to raise the point at which an estate must pay IHT to £2million as part of massive across-the-board tax reductions.

It’s likely, then, that the headline rules for Inheritance Tax will remain in place after the election and families affected by IHT will be subjected to the rules as they are - at least for now.

To work out whether your estate could potentially fall within the scope of the tax, bear in mind that up to £325,000 can be passed on with no IHT due. This is known as the “nil-rate band”. Your estate can include any money held in cash or investments, property and other possessions. Anything over the nil-rate band can potentially face 40% tax.

However, the rules also contain important allowances and exemptions that can mean what looks like a significant liability might not be. Notably, there are several instances when gifts can be made without the tax being an issue.

Tax rules can change so always ensure you are keeping within the rules at the time and consider professional advice if you are unsure about your liabilities.

Here’s eight mainstream ways to cut IHT bills.

1. The power of spouses

One the simplest but most important exemptions to IHT is money passed to a spouse or civil partner, which attracts no IHT at all.

Furthermore, spouses and civil partners can pass unused nil-rate band to each other. For example, a husband who dies and passes £100,000 of inheritance to his children would have £225,000 of nil-rate band remaining to pass to his surviving wife, who could then add this to her nil-rate band meaning she could pass on £550,000 without paying any tax.

And there is a further exemption if the estate being passed includes a primary residence - a home in which you live. This means an extra £175,000 of nil-rate band per person.

2. Pension protection

Pensions can provide some shelter from IHT because money held inside a pension won’t normally count towards your estate. There may be other tax to pay, however.

If you die before age 75, the money in your pension can be received by beneficiaries as either a lump sum or income without any tax usually applying. If death occurs after age 75 then that money would be taxed according to the beneficiary’s tax rates.

There’s more information about IHT, including how it affects money held within a pension, here.

3. Gifts under the seven-year rule

You can gift any amount of other assets with no IHT to pay if seven years pass without you dying. If you die within seven years, a reduced rate applies to any amount above your nil-rate band.

If death happens before three years has passed the full 40% rate applies, then 32% if you die after three years, 25% after four years, 16% after five years and 8% after six years.

4. Your annual exemption

You can give away £3,000 per year of assets or cash, divided between one or more people, without IHT applying at all. What’s more, you can carry forward one preceding year of annual exemption - so you can gift £6,000 if you haven’t used the exemption from the year before.

5. Small gifts

You can give £250 per person, per year to as many people as you like without IHT applying - although not to someone who has already benefitted from your £3,000 annual allowance.

6. Wedding gifts

You can give £1,000 to anyone you like to help pay for their wedding, and this rises to £2,500 for a grandchild and £5,000 for a child. The gift has to happen before the big day, not after, and the wedding has to actually happen!

7. Gifts to financially support a child

You are allowed to give money to pay for the living costs of a child under age 18, or in full time education. That includes a child at university. It may have to be shown that this money was not excessive and only enough to cover living costs and tuition fees.

8. Gifts out of your income

You can give regular amounts away that you don’t need from your income without IHT applying. That means your salary, rents from property, investment and savings income after tax - but not capital itself.

This is potentially very valuable because there is no cash limit on what can be gifted, but it must within the limits of your regular income after regular living costs have been taken into account.  If you use this exemption, it may have to be shown that this money was not needed to ‘maintain your standard of living’. The taxman will look at various things to establish that you have used the exemption appropriately. It will help if these are payments that are made regularly, although that may not mean the same amount every year, or even to the same person.

If you use this exemption, it can be valuable to keep a record (an emailed letter, for example) confirming the level of the payment, that you can afford it from your income and that the payments will be ongoing basis. Your executor may also have to prove your income to HMRC.

A note of caution

The ultimate judgement on whether tax is due is taken after death. The executor of an estate - you can nominate someone yourself - must confirm to HM Revenue & Customs that all due tax has been paid, and the revenue can request proof from them.

For that reason, it is important to keep clear records of income during your life, and also of any paperwork concerning gifts that you believe to be exempt from IHT.

If you are relying on these exemptions to make gifts, your executor may have to produce the relevant details, so make it easy for them.

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Tax treatment depends on individual circumstances and all tax rules may change in the future. This information is not a personal recommendation for any particular investment.  If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.

Share this article

Latest articles

How maxing out a Junior ISA can turn into a £243,561 nest egg

Harness the power of a Junior ISA for your child


Becks Nunn

Becks Nunn

Fidelity International

Fundsmith Equity Fund: update from Terry Smith

Underweight exposure to tech has affected performance negatively


Nick Sudbury

Nick Sudbury

Investment writer

The changing shape of the Trump trade - market week

What’s driving your investments this week?


Tom Stevenson

Tom Stevenson

Fidelity International