You may already have an estate plan in place that secures your legacy for your beneficiaries and helps ensure the efficient transfer of your wealth.

However, there could still be Inheritance Tax (IHT) mitigation strategies you have overlooked that could further improve the efficiency of your estate. This may be because you were unaware of them before, or that they weren’t previously suitable for your situation.

Either way, it’s important to consider all the strategies available to you to ensure you make full use of all your opportunities.

Read on to discover four lesser-known ways to mitigate IHT.

1. Regular gifts from surplus income

You’re likely already aware of the annual £3,000 gifting allowance, which allows you to give away assets each tax year without them forming part of your estate for IHT purposes.

However, there is a lesser-known gifting exemption that can be worth considerably more, depending on your circumstances.

Regular gifts made from your surplus income have no upper limit on the amount you can give, provided certain conditions are met.

Surplus income is the income you have left after paying tax and covering your normal living costs. Gifts that qualify for this exemption are typically considered outside of your estate for IHT purposes immediately and are not subject to the usual seven-year gifting rule.

To qualify, the gifts must:

• Come from income, not capital. This includes income such as salary, pension payments, dividends, or rental income. You cannot fund the gifts from your savings. Income that has been left untouched for more than two years is typically treated as savings by HMRC.
• Be given regularly. There is no minimum period for gifts to qualify as regular, but there should be a clear intention to give on an ongoing basis. This could be through monthly standing orders, annual gifts, or regular contributions towards a specific cost, such as school fees.
• Not reduce your standard of living. After making the gifts, you should still have enough income to meet your normal day-to-day expenditure.

When making regular gifts from income, good record-keeping is key, as your beneficiaries may need to prove to HMRC that the gifts met the conditions for the exemption. So, it’s a good idea to keep evidence of your income, outgoings, and any regular gifts you make.

2. Charity donations

Anything you leave to a registered charity in your will is automatically exempt from IHT, and any donations you make during your lifetime are similarly exempt.

As such, leaving money to causes close to your heart is one of the simplest ways to mitigate the IHT liability on your estate.

Moreover, if you leave 10% of your net estate (the value of your estate once all debts and administrative costs are covered) to charity in your will, the IHT charged on the remaining liable portion reduces from 40% to 36%.

So, allocating a portion of your estate to charity can support causes you care about and offer a tax-efficient boost for your beneficiaries.

3. Buying woodland

Business Relief (BR) and Agricultural Relief (AR) are commonly used IHT mitigation strategies, in which certain business and agricultural assets can be offered up to 100% relief, provided conditions are met.

However, perhaps slightly less well known is the fact that buying woodland can qualify for BR and AR, or failing that, the land may also be eligible for Woodlands Relief.

If you own woodland that is managed commercially, it can qualify for up to 100% BR on the total value of the land and trees. If the woodland is a necessary component of an agricultural holding, it may qualify for AR.

To qualify for BR or AR, you need to have owned the woodland for at least two years before your death. There is also a combined £2.5 million cap on the amount an individual estate can claim 100% AR and BR on.

If your woodland does not qualify for BR or AR, you may be able to claim Woodlands Relief.

Woodlands Relief allows the IHT payable on the value of growing trees or underwood to be postponed until the timber is felled, sold, or gifted. This means that the IHT isn’t exempted; rather, it is deferred until the timber is sold or disposed of.

While purchasing woodland can be an effective way of mitigating IHT, this is not currently an area of estate planning that Bluesky can advise you on.

4. A deed of variation

A deed of variation is not an IHT mitigation strategy in itself but is a legal document that your beneficiaries can use to help reduce your estate’s liability.

If you have a deed of variation, your executors can make changes to your will after you’ve passed away, provided:

• All changes are made within two years of your death
• Everyone affected by the changes agrees to the new plan

There are a few ways a deed of variation can reduce the IHT bill on your estate.

For instance, if your will wasn’t set up to maximise certain allowances, such as the spousal exemption or the residence nil-rate band, your family can make changes to help ensure you make full use of them.

Or they could choose to donate a portion of the estate to charity to help support causes you cared about and reduce the IHT rate on the remainder, as discussed above.

Finally, a deed of variation can also be used to skip a generation. This can be helpful if your children are older and already financially secure, as it means your wealth only gets taxed once as it is passed through the generations.

Get in touch

To find out how you could use some of these strategies or others to help ensure the efficient transfer of your wealth, get in touch.

Email info@blueskyifas.co.uk or call us on 01189 876655.

Please note

This article is for general information only and does not constitute advice. The information is aimed at individuals only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate estate planning.