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Top three ways to manage inheritance tax

If you think you those who inherit your estate will have to pay Inheritance Tax, here are three things you can do to reduce the final bill.

1) 'Gift' it to your spouse or other member of your family

The rules are a bit different depending whether you choose to gift parts or all of your estate to your direct spouse or civil partner versus another member of your family. If you’re married or in a civil partnership, you can give anything you own to your spouse or civil partner - so your estate won’t have to pay Inheritance Tax on what the gift’s worth (although there are different rules if your spouse or civil partner’s permanent home is outside the UK).

If you give something to a family member who is not your spouse or civil partner, so that you no longer get any benefit from it, the value of the gift will still be included in your estate for Inheritance Tax – but only for seven years. So, if you live for the seven years or more, it won't be counted as part of your estate when you die.

You can give away limited amounts every year and not have to pay Inheritance Tax.

2) Put something into a trust

If you put some of your estate into a trust (which you, your spouse and none of your children under 18 years can benefit from), they are not necessarily going to be subject to Inheritance Tax. So, for example, you could set up a trust to pay for your grandchildren's education or support a family member with a disability. The rules around trusts are complicated so you must take advice from an expert because some types of trust might have to pay Inheritance Tax themselves.

3) Leave something to charity

Anything you leave to charity is free of Inheritance Tax so it can be a useful way of reducing your Inheritance Tax bill, while benefiting a good cause. However, an added incentive is that if you leave at least 10 per cent of your estate to charity, it will cut how much Inheritance Tax is due on the rest. The taxman will only be able to claim 36 per cent rather than 40 per cent. It can mean that family and friends will receive more than they would do otherwise – and charities also benefit.

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