You can potentially reduce your inheritance tax bill by giving gifts while you're still alive.
Any gifts of valuable possessions or money given 7 years before you die are exempt from inheritance tax. If you die within 7 years, a sliding scale of inheritance tax will apply (if your estate is over the nil rate band). If any tax is due on gifts given during your lifetime, it is payable by the beneficiaries of those gifts, rather than your estate.
For more information on lifetime gifts, click here.
Reducing inheritance tax by giving to charity
Just like gifts to married or civil partners, anything you leave to a charity is deducted from the value of your estate. For instance, if you died leaving an estate worth £350,000 including a charitable gift of £30,000, you would not need to pay any inheritance tax. Your estate would be calculated as being worth £320,000 (£350,000 - £30,000), and therefore below the nil rate band. On top of this, if you leave 10% of your 'net' estate to charity, the inheritance tax rate will be reduced from 40% to 36%.
For example, if you are unmarried, do not have a property and leave an estate worth £525,000 to your two children, your net estate is worth £200,000 (£525,000 minus your nil rate band of £325,000). At the normal inheritance tax rate of 40%, you will owe £80,000 in tax, leaving your children to inherit £445,000 in total.
However, if you include a charitable gift of £20,000 (10% of your £200,000 net estate), leaving the remaining £505,000 to your children, then the inheritance tax rate is reduced to 36%. Now you will only owe inheritance tax on £180,000 (£505,000 minus your nil rate band) and at the reduced rate of 36% - resulting in a tax bill of £64,800.The result is that your children receive £440,200 (£4,200 less than before), the charity receives £20,000 and you save £15,200 on inheritance tax. So while this does mean that your beneficiaries receive less, if there are charitable causes you feel strongly about, this is a very efficient way of giving to them.
Inheritance tax on pensions and life insurance
In general, pensions and life insurance policies can be good ways of minimising your tax bill. With either of these, make sure your policies are written 'in trust'. This means that any payouts will not form part of your estate, but will go straight to your beneficiaries without needing to pay inheritance tax.