Worried about your loved ones paying inheritance tax upon your death? If so, the good news is there are many ways you could reduce your inheritance tax liability. And the sooner you put your plans in place, the more effective they may be.
Here are five ways you can tackle your inheritance tax liability:
1) Make a gift
Annual gift allowance – each year, you’re able to give away cash or a gift worth up to £3,000, which is automatically exempt from inheritance tax upon your death.
And one great benefit is that you can transfer your unused allowance over to the following year – so in one year, you’re entitled to give away up to £6,000.
Marriage gift exemptions – parents are able to give cash or gifts worth up to £5,000 when their child gets married. For grandparents it’s up to £2,500 and £1,000 for anyone else.
Small gift exemption – gifts of up to £250 a year can be made to as many people as you like.
Charitable donations exemptions – the Government will reduce the inheritance tax payable on your estate from 40% to 36% should you be willing to donate at least a tenth of your net wealth (estate above your nil rate band) to good causes.
Organisations include registered charities, national institutions such as the British Museum, recognised political parties, universities and other gifts for national benefit. As well as the reduced inheritance tax rate, any gift to the mentioned organisations is also exempt from tax.
Other gifts – you can give away as much as you want and providing you survive seven years from the date of the gift, the value of the gift will fall outside of your estate for inheritance tax purposes. If you’re considering this route, you need to ensure you’ll have enough money left over to maintain your quality of life during your later years.
You’re able to make unlimited direct gifts of cash, shares or other items of value – known as Potentially Exempt Transfers (PETs) – and they will be deducted from your estate.
Should you die within the seven-year period, your estate may still have to pay tax on these PETs, on any part of the gift that’s in excess of your inheritance tax threshold. However, the tax payable will reduce after the first three years (known as ‘Taper Relief’), and then fall further each year on a sliding scale.
2) Make a Will
This is a vital part of estate planning and ensures that your assets are distributed to the right people.
It’s especially important if you have a spouse or partner, as there is no inheritance tax payable between the two of you but there could be tax payable if you die intestate (without a Will) and assets end up going to other relatives.
When assets are placed into trust, they no longer form a part of your estate. There are many types of trusts available, which can be set up at little or no charge.
They usually involve settlors investing a sum of money into a trust. The trust has to be set up with trustees – whose roles are to ensure that the investment is paid out at the wishes of the settlor. In most cases, this will be to children or grandchildren.
A trust can be set up in a number of ways depending on your objectives and requirements for any future access to income or parts of capital. Trust planning can help minimise or in some cases mitigate an IHT liability.
4) Gifts out of Normal income
If you receive more income (after tax) than you need in order to support your standard of living, you may be able to regularly gift the surplus amount to your loved ones, potentially free from inheritance tax. Provided it’s clear you intend to continue gifting in this manner, even if only one payment happens to be made before an unexpected death, it could qualify for this exemption.
Regular gifts could be directly to a family member or beneficiary, or even used to fund a regular premium Whole of Life trust to pay any other tax due on your estate.
5) Life insurance
Another way you can tackle your inheritance tax is by insuring your potential liability, which involves taking out life insurance to cover the costs of the 40% tax bill.
This could potentially include:
A Whole of Life policy – which has a sum assured, paid to the beneficiaries or executors of your estate on death. This is written under Trust and won’t be added to your estate, as the money in the Trust doesn’t belong to you – it belongs to your chosen Trustees and can be used to pay towards any inheritance tax bill on your estate.
A Level Term Assurance – this is designed to provide a lump sum upon your death during the term of the policy. Should you die within seven years of having made a PET or CLT (Chargeable Lifetime Transfer), this option could cover the potential IHT liability that would arise.
Financial advice available
Inheritance tax is an extremely complex area, and the consequences of ignoring it or getting it wrong could prove costly and distressing for your loved ones.
We don’t want this to happen – which is why we’re here to offer guidance and support through face-to-face financial advice.
We can find out whether you could be liable for inheritance tax and if necessary, we’ll work with you to put the right plans in place.
Wills and some areas of Inheritance Tax (IHT) Planning are not regulated by the Financial Conduct Authority. Some IHT planning solutions put your capital at risk so you may get back less than you originally invested. IHT thresholds depend on your individual circumstances and prevailing legislation, both of which may change in the future. Wills are not regulated by the Financial Conduct Authority. Will writing is not regulated by the Financial Conduct Authority.