Make regular gifts
People can also make regular gifts from their income – of any amount – as long as they can demonstrate their standard of living has not been affected. These gifts are immediately IHT-free and there is no seven-year rule.
Verity Kirby, private client partner at law firm Shakespeare Martineau said: “Habitual gifts, paid from any excess income, without adversely affecting the standard of living of the individual making the gift, are also exempt from inheritance tax.
“This method of gifting needs to be carefully recorded as evidence will need to be provided to HMRC to prove the gifts were genuinely made out of excess income, in the event of the beneficiary dying within seven years.”
Give to charity
According to Mr Davies, if a person leaves at least 10 percent of their net estate to a charity or a few other organisations, they may be able to get a discount on the IHT rate. It could reduce to a 36 percent tax instead of 40 percent – on the rest of the estate.
Use the pension allowance
Pensions are not usually subject to IHT for those under 75 years old – they can be passed on tax efficiently and, in some cases, even tax-free.
Stevie Heafford, partner at accountancy firm HW Fisher said: “While ISAs give the opportunity for tax-free growth and income, they still fall within the taxable estate on death and are subject to inheritance tax at that point.
“So if you have a pension pot but also other investments, it makes sense to utilise the other investments to defray expenses during your lifetime (or even to make lifetime gifts) and leave the pension to be passed on tax-free on death.”
However, she notes: “There can be other tax charges associated with passing on pensions depending on the type of pension it is, how you are paid the pension and the age of the person who has died.
“For example, if you receive a lump sum payment and the owner of the pension was under the age of 75 when they died, you will usually pay no tax. If you receive a lump sum but the owner of the pension was over 75 when they died, you will usually be subject to income tax which will be deducted by the provider.”