There are several ways in which you can reduce your exposure to inheritance tax, such as giving assets away (directly or into trust), investing in assets that qualify for discounts or reliefs, insuring the tax liability or simply spending it! Everybody is different, so it’s important to consider what is the right approach for you.

There is no limit on how much someone can give away, but there could be inheritance tax consequences on your death. Capital gifts made to individuals which exceed your annual gift allowance are usually classified as ‘potentially exempt transfers’ (PET). This means that you need to survive 7 years after making the gift before it falls outside of your estate. If you died within the 7 years, your nil rate band is reduced by the value of the gift.  Gifting assets into trust can have more complex implications if they fall under the chargeable lifetime transfer rules.

A gift with reservation occurs when someone gives away an asset but continues to benefit from it in some way. In the absence of a formalised commercial agreement e.g. to pay a reviewable market rent, the value of the gift will be treated as part of their estate for inheritance tax purposes regardless of who legally owns it. You should always seek legal advice if you intend to enter into such an arrangement. There can be other complex implications depending on your situation such as pre-owned asset income tax or even a deprivation of asset investigation if you require long-term care.

A Lasting Power of Attorney (LPA) allows nominated individuals (attorneys) to act on a donor’s behalf to make ‘Property and Financial’, and/or ‘Health and Welfare’ decisions. Although they must be registered whilst the donor still has mental capacity, the donor can allow attorneys to make decisions once the LPA has been registered. This may be particularly useful if mobility (rather than mental capacity) becomes an issue.

An Enduring Power of Attorney (EPA) only covers decisions about property and financial affairs, and the attorney cannot act unless the donor loses their mental capacity. Only EPAs made and signed before October 2007 can still be used.

Someone will need to apply to the Court of Protection to become your ‘deputy’. in order to make decisions on your behalf. There are 2 types of deputy. Property and Financial (to pay bills, organise pensions or investments and manage property) or Personal Welfare (to make decisions about medical treatment or how someone is looked after).

Engaging with the Court of Protection can be a long process, as the court needs to be assured that you have lost capacity and that the deputy is fit for the role. It is also an expensive process as there are application fees, annual supervision fees and potentially court fees if your case needs a hearing. You should therefore consider making a Lasting Power of Attorney.

If you die without a Will, someone will need to apply for a ‘grant of letters of administration’. This will make them the administrator and allow them to value the estate, pay any inheritance tax and debts, and distribute the estate. Without a Will, an estate is distributed in accordance with a set of rules known as the laws of intestacy.

In particular, these rules dictate that partners who are not married or in a civil partnership have no automatic right to inherit, nor do close friends or stepchildren. Even if the deceased had a spouse, these rules can inadvertently increase exposure to inheritance tax – as a Spouse may not be entitled to receive the full estate proceeds. It is therefore important that you consider making a Will to ensure that your estate is distributed in accordance with your wishes.

Inheritance tax (IHT) will normally fall due when the value of your estate exceeds the nil-rate band threshold of £325,000 but this could be effected if you have made gifts in the past. If your home is distributed to your children or grandchildren you may also be eligible for an additional ‘residence’ nil rate band. This could be up to £175,000 if your estate is worth less than £2 million.

Passing assets to your spouse or to charity on death is normally exempt from IHT. Otherwise, the standard rate of inheritance tax is charged at 40%. A reduced rate of 36% may apply if 10% or more of your net estate is left to charity.