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In the build up to the general election the Conservatives announced plans to increase the inheritance tax threshold from £325,000 to £1 million. However, with the post-election need to form a coalition with the Liberal Democrats, any further consideration of such an increase has been put on hold (both parties are at opposite ends of the spectrum ideologically on inheritance tax).
With the threshold remaining at £325,000 for at least the next four years, anyone looking to minimise the tax charge on their estate must, as the bare minimum, ensure that they have a will in place and take advantage of as many inheritance tax reliefs as possible.
Starting with the basics, the taxman can take 40% of everything you leave that is over the threshold. This means that if you leave assets worth £500,000 then you will not pay any tax on the first £325,000; but you will pay 40% tax on the remaining £175,000. That's a tax bill of £70,000!
The threshold is £325,000 per individual; so as a married couple your allowance would be £650,000 between you. You share this allowance and any assets that your transfer or leave to your spouse (or civil partner) should be exempt from inheritance tax (although there are some exceptions). If your partner dies before you without having made any lifetime gifts you will continue to qualify for their inheritance tax allowance if they leave their entire estate to you. This is one of the reasons that it is important to make a will because it is not necessarily the case that all your estate will pass to your partner in the event of your death without a will.
Assuming that your estate exceeds £325,000 (or £650,000 if you are married) there are some very basic techniques that you can apply to reduce your inheritance tax liability:
When you make a gift it needs to be a genuine, unconditional gift, in order to qualify for one of the gift exemptions.
There are other inheritance tax reliefs that do not rely on the requirement to make a gift. Such reliefs tend to be quite technical and need to be applied to the individual situation. Applying these types of reliefs and also the relief for normal expenditure out of income is something that you should take professional advice on, because the consequences of making a mistake can be quite costly in terms of unpaid tax, penalties and interest.