Investments often exempt from or used to mitigate inheritance tax (IHT) include pensions, life insurance policies payable to named beneficiaries, AIM-listed shares, and holdings in Enterprise Investment Schemes (EIS). Business Property Relief (BPR) can make specific investments, such as shares in unlisted companies or agricultural property, exempt if held for at least two years.
Charity exemption
Like the spousal exemption, assets passing to charity on death are exempt from inheritance tax. As such, if an entire estate passes to charity, there will be no inheritance tax due.
To avoid inheritance tax (IHT), consider investments like AIM-listed stocks, Enterprise Investment Schemes (EIS), or Venture Capital Trusts (VCTs), which offer Business Property Relief (BPR) after a two-year holding period, removing them from your estate. Also, using trusts to hold assets and funding pensions or 529 education accounts removes assets from your taxable estate, while life insurance can provide tax-free funds for beneficiaries.
Edit: If you do have a significant inheritance, putting it into a brokerage or retirement account is a good idea. I would go brokerage with money you may need and the rest into an IRA, since this will be best long-term. For investments, index funds are great.
Ways to reduce Inheritance Tax
The 10-5-3 rule is a simple guideline for long-term investment returns, suggesting 10% average annual returns for equities (stocks), 5% for debt instruments (bonds), and 3% for cash (savings accounts), helping investors set realistic expectations and build diversified portfolios balancing risk and stability, though these are historical averages, not guarantees.
What to do with an inheritance
Give more money away
Lifetime gifting is a straightforward way to begin reducing your IHT bill. By gifting money during lifetime, that would have been part of an inheritance anyway, you reduce the size of your estate so that there is smaller amount subject to IHT on your death.
Transfer assets into a trust
Because those assets don't legally belong to the person who set up the trust, they aren't subject to estate or inheritance taxes when that person passes away. Setting up a trust also has other financial benefits, such as helping the estate avoid probate.
if you dispose of the inherited property within 2 years (or the within an extension period) of the deceased person's death. Note: The 2-year limit is extended if disposal of the property is delayed by exceptional circumstances outside your control.
While state laws differ for inheritance taxes, an inheritance must exceed a certain threshold to be considered taxable. For federal estate taxes as of 2024, if the total estate is under $13.61 million for an individual or $27.22 million for a married couple, there's no need to worry about estate taxes.
Once you've had some time to heal, you can start thinking about how you want to use your inheritance. A short term-deposit or simply a high interest savings account can be a good place to park your inheritance until you're ready to look at your financial options.
Want to make your assets virtually untouchable by creditors and lawsuits? Equity stripping may be the answer. This advanced technique involves encumbering your assets with liens or mortgages held by friendly creditors, such as an LLC or trust you control.
Ramsey believes investing should take up a good percentage of your cash inheritance so it can grow. Spend some of it. People who work hard also play hard. Spending some of your cash inheritance on something you've always wanted but couldn't afford is okay.
2. Changes to Gifting & Inheritance Rules. Annual Gift Tax Exemption Increase: You can now gift up to $19,000 per person per year without triggering taxes. A married couple can give $38,000 to each child or grandchild tax-free.
Every individual has a basic Inheritance Tax (IHT) threshold of £325,000, known as the Nil Rate Band. Assets below this value generally pass to beneficiaries free of tax. If the estate is worth more than that, IHT at 40% usually applies on the excess, unless exemptions or reliefs reduce the amount due.