Top 5 ways to cut Inheritance Tax
Unbeknown to some, there are several ways to reduce or even avoid the dreaded Inheritance Tax charged on your estate when you die.
IHT is a tax associated with the distribution of assets after (and in some cases, before) death and can take significant chunks of inheritance away from the loved ones to whom you’ve assigned it.
Here are 5 of the best IHT tips and ways in which planning for Inheritance Tax can help to reduce your bill.
#1 - Leave gifts to your partner
A spouse or civil partner is classed as an ‘immediately tax-free’ relative, meaning that any gifts they receive from you – either in your will or before death – are not subject to Inheritance Tax. In fact, married couples and civil partners are able to hand over their entire estate to a spouse or civil partner tax-free when they pass away.
One thing that’s worth noting though, is that anything inherited by a spouse will then make up part of their estate. When you pass away, their tax-free allowance doubles from £325,000 to £650,000, giving them extra room to pass both of your assets on when they die.
Partners born outside of the UK might be subject to different IHT rules and might not be classed as ‘immediately tax-free’.
#2 - Leave gifts to family & friends
When leaving gifts to anybody other than a spouse or civil partner, the government enforce what is known as a ‘7-year rule’. This rule makes IHT payable on significant gifts that have been given up to 7 years prior to death.
The rate at which IHT is charged depends on how soon before death the gift is given – rates are determined by a sliding scale known as ‘taper relief’ and range from 8% to 40%. Gifts that are given at least 7 years before death are not subject to IHT.
There are also exceptions to the taper relief rule, with a gifting limit of £3,000 per person each tax year. On top of this, wedding gifts valued at up to £5,000 and smaller, less valuable Christmas and birthday presents and cash gifts, which assist with day-to-day living, are also excluded.
Gifts given out of excess income (income which you can dispose of without it having an impact on your standard of living) are also free from Inheritance Tax.
You may not think it, but giving significant gifts – even to your children – can cause complications in the future when it comes to IHT. Before offering significant gifts to friends and family, seek advice from a professional to see whether or not the recipient might be affected if you were to die.
#3 - Write assets into trust
Any of your assets that are written into a trust – be that property, cash or even a life insurance policy – are exempt from Inheritance Tax. Not only that, but they are no longer classed as part of your estate and therefore can help to bring its value below the £325,000 Inheritance Tax threshold.
Assets that are written into trust are the responsibility of the trustee, who must abide by the rules set by you when dealing with them in the future.
For example, you may have placed a property in trust to be put in your child’s name when they reach the age of 21, or perhaps you have put aside a large sum of cash to pay the deposit on their first home. Either way, placing assets in trust is a great way of reducing the overall value of your estate without negatively impacting your beneficiaries.
#4 - Donate to charity in your will
Aside from using your wealth to help a great cause, one of the main benefits of leaving a donation to charity in your will is that it is completely tax-free.
This is one of the several ways of reducing an IHT bill, as the tax paid on anything beyond your £325,000 allowance will also be reduced from 40% to 36% when you donate at least 10% of your estate to a chosen charity, meaning that giving a share of your assets to charity won’t take as much inheritance away from your other beneficiaries.
Of course, if you do the maths, your family and friends are still likely to receive a slightly smaller inheritance than if you decided not to donate to charity, but this is a great way to make your wealth go that little bit further.
#5 - Prepare for IHT with life insurance
Taking out life insurance will not reduce the value of your estate – in fact, it will increase it unless you place it in a trust.
By taking out a life insurance policy, you can ensure that your loved ones will have a guaranteed lump sum of money to help cover the cost of any Inheritance Tax or other expenses that your estate might be subject to. This means that they will not need to dip into their own pockets, or into their inheritance, to make these payments themselves.
Remember, that any potential life insurance payouts will count as part of your estate unless you write them into a trust. Writing life insurance in trust ensures that you aren’t adding to the value of your estate unnecessarily, while the rules you put in place can guarantee that the money is used to cover any death tax.
Write a will and cut Inheritance Tax
Until you write a will, it’s unlikely that you’ll appreciate the total value of your estate. This means that you could potentially risk leaving your loved ones with thousands of pounds worth of tax to pay after you pass away, taking away from the inheritance that you so hoped they would benefit from.
If you’re concerned about how your assets will be split up when you die, writing a will is the best way to make your voice heard in legal terms.
At Quick Wills, we provide an online will-writing service that gives people the tool to create their last will and testament. Our easy steps aim to remove any stress and anxiety that comes with putting together such an important, legally binding document.
To start writing your will and reducing your potential Inheritance Tax bill, or if you have any problems or queries, you can contact us below and one of our friendly experts will be glad to help.