Inheritance tax (IHT) can take a significant chunk out of the wealth you mean to leave for your loved ones. You can minimise inheritance tax liability through careful estate planning and smart financial decisions. This not only helps preserve your wealth but also ensures your beneficiaries receive more of your estate.
One effective strategy is to give your assets away. If you gift assets and survive for at least seven years, these gifts are free from IHT. Additionally, setting up a life insurance policy written into trust can also protect your estate from large tax bills.
Owning a business or investing in small companies can provide valuable tax reliefs. Transferring business assets or reinvesting in qualifying enterprises can significantly reduce the amount of tax due on your estate. For more details on these strategies, check out the tips provided by Hargreaves Lansdown.
When it comes to inheritance tax (IHT) in the UK, it is important to know how it impacts your estate and what the thresholds and rates are. This can help you plan more effectively.
Inheritance tax is a tax on the estate of someone who has died. It includes all possessions, property, and money. Not everyone pays IHT; it only applies if the estate's value exceeds a certain threshold. The current rate is 40% on anything above the IHT threshold.
If the estate's value is below this threshold, no IHT is due. There are legal ways to reduce the taxable estate, such as gifts and trusts. Life insurance policies, if set up correctly, can also help cover inheritance tax.
The IHT threshold, or nil-rate band, is currently £325,000. This means the first £325,000 of the estate is not taxed. Anything above this amount is taxed at 40%.
There is an additional residence nil-rate band for those passing on their home to direct descendants, adding up to £175,000 to the threshold. This can increase the total threshold to £500,000.
If the estate exceeds £2 million, the residence nil-rate band reduces by £1 for every £2 over this limit. It’s crucial to keep these thresholds in mind when planning your estate.
When planning to minimise inheritance tax, it's vital to take advantage of legal exemptions and reliefs. These provisions can significantly reduce the tax burden on your estate, benefiting your heirs and ensuring compliance with UK law.
If your estate is left to your spouse or civil partner, it’s exempt from inheritance tax. This exemption ensures that assets can be transferred without tax implications. It's especially beneficial as it also includes transferring any unused nil-rate band allowances to the surviving partner. This can increase their allowance and further reduce inheritance tax liabilities.
Gifts to charities and political parties are entirely exempt from inheritance tax. Donating at least 10% of your estate to a registered charity can also reduce the inheritance tax rate from 40% to 36%. This incentivises charitable giving and can considerably reduce the taxable value of your estate.
Business Property Relief (BPR) and Agricultural Relief allow significant reductions on the tax due on business assets. BPR can offer up to 100% relief on qualifying business assets, such as business shares. Similarly, Agricultural Relief provides up to 100% relief on qualifying agricultural property. These reliefs support the continuation of family-run businesses and farms.
Potentially Exempt Transfers (PETs) are gifts that may become exempt from inheritance tax if you survive for seven years after making the gift. The value of these gifts starts reducing after three years, benefiting from taper relief. PETs leverage the nil-rate band and annual exemptions to minimise tax impact on large gifts transferred during your lifetime.
Minimising your inheritance tax liability involves using tax-efficient strategies such as gifting and allowances, trusts, life insurance policies, and pensions. These approaches can help manage the inheritance tax burden more effectively.
Gifting your assets while you are still alive is a key strategy to avoid inheritance tax. You can make use of the £3,000 annual gift allowance. This allows you to give away up to £3,000 each year without it being added to your estate for inheritance tax purposes.
You can also make larger gifts, known as Potentially Exempt Transfers (PETs). These gifts become completely tax-free if you survive for seven years after making the gift.
Additionally, you can give tax-free wedding gifts up to £5,000 to your children, £2,500 to grandchildren, and £1,000 to others.
Using trusts is a sophisticated way to reduce your inheritance tax liability. When you put your assets into a trust, they no longer form part of your estate for inheritance tax purposes. This means those assets can be passed on to your beneficiaries without attracting inheritance tax.
There are different types of trusts such as bare trusts, discretionary trusts, and interest in possession trusts. Each has its own rules and tax implications. Trusts allow you to retain some control over how the money is used and offer flexibility in estate planning.
Taking out a life insurance policy can help cover your inheritance tax bill. To ensure that the payout from the life insurance policy does not form part of your estate, you should write the policy into trust.
By doing this, the payout goes directly to your beneficiaries and can be used to pay the inheritance tax, preventing a financial burden on them. This can be particularly helpful if you are relatively young and healthy, as policies are generally less expensive.
Pensions can be an effective tool in reducing inheritance tax. Pensions are not usually considered part of your estate for inheritance tax purposes. Therefore, shifting savings into a pension can protect these funds from inheritance tax.
Money left in a pension can be paid out to beneficiaries tax-free if you die before age 75. If you die after age 75, the beneficiaries will pay income tax on the pension based on their own tax rate, which is generally lower than inheritance tax.
By using these strategies, you can manage and reduce your inheritance tax liability, ensuring a larger portion of your estate is passed on to your loved ones.
Effective estate planning can help you manage your assets, reduce tax liabilities, and ensure your wishes are met. This involves drafting a will, managing investments, and exploring equity release options.
Creating a will is essential for directing how your assets will be distributed after your death. A will clearly states your wishes and helps avoid the default intestacy rules, which might not align with your preferences. Without a valid will, your estate could face disputes and higher taxes. Include all your assets, such as property, investments, and personal items.
Consider appointing trustworthy executors who will carry out your instructions. Professional advice can help ensure all legal requirements are met and reduce potential conflicts among beneficiaries. Regularly review and update your will to reflect any changes in your circumstances or the law.
Managing your investments and assets is critical to minimising inheritance tax (IHT) liabilities. Start by valuing all your assets and calculating your net worth using an inheritance tax calculator. This will help determine if your estate exceeds the inheritance tax threshold.
Consider using tax-efficient investments like ISAs, which offer tax-free allowances. Trusts, such as an interest in possession trust, can also be a useful strategy to place assets outside your estate, reducing your IHT bill. Always seek professional financial advice to navigate potential capital gains tax implications and ensure your investment strategy aligns with your goals.
Equity release can provide you with financial resources while reducing the value of your estate liable for inheritance tax. Lifetime mortgages and home reversion plans are common equity release options. In a lifetime mortgage, you borrow against your property’s value, with interest rolled up and repaid when the property is sold. A home reversion plan involves selling part or all of your property in return for a lump sum or regular payments.
Equity release can help manage your estate's size, but it is essential to understand the long-term impact on your estate and beneficiaries. Professional advice is crucial to evaluate whether this approach suits your situation and to understand the associated costs and implications.
Looking for expert, regulated and independent advice on your pensions? Assured Private Wealth can help. Get in touch today to discuss your pension planning or if you need advice on inheritance tax or estate planning.
Call us for a friendly chat on 02380 661 166 or email: info@apw-ifa.co.uk
