It’s not always possible to avoid paying inheritance tax completely. However, there are a number of ways to limit the amount you will need to pay, and a number of reliefs that can be utilised.
Here are our top 10 tips on how to limit inheritance tax or remain under the threshold:
1. Make a valid will
Ensure that your will is up to date and that you have taken advice from a qualified practitioner who can clearly inform you how it should be structured to avoid unnecessary inheritance tax. Without a valid will it is possible that the government rules, called the ‘intestacy provisions’, will apply which could have the unintended consequence of causing inheritance tax to become payable on your death.
2. Make use of your allowances
The current inheritance tax threshold (also known as the nil rate band) is £325,000. If you keep your estate below this threshold then no inheritance tax will be payable. Keep in mind though that gifts made in the seven years before your death count towards your estate.
The residence nil rate band can also be transferred, giving a possible total allowance for a couple of £1million. If your estate exceeds £2million you should seek advice from us on your eligibility for this allowance.
3. Make gifts
In most cases, so long as you survive seven years from making gifts they will be free from inheritance tax. You can also give away £3,000 in total every tax year without attracting any inheritance tax on your death. Certain gifts on occasions of marriages and other small gifts are also free from inheritance tax. Not all gifts will be free from inheritance tax so it is important you seek advice if you are planning on making gifts. It is also important you consider your ability to make gifts and any other taxes that might apply. We are able to work seamlessly with your financial adviser and tax adviser in assisting you with your inheritance tax planning.
4. Give away your excess income
A little known exemption from inheritance tax applies, which allows you to avoid the seven year rule, if you can prove the gifts you were making came out of your excess income. To successfully obtain this relief it is important that good records are kept. We can help you ensure that you are retaining the right information to make a successful claim.
5. Make use of trusts
If you wish to give away assets but are worried about losing control, or about passing on a large inheritance to a young beneficiary, then a trust is a perfect solution. After seven years, a gift in to trust will be free from inheritance tax and you can continue to retain control of the assets, deciding who benefits and how. To ensure you avoid inheritance tax it will be necessary for you to give up your right to benefit from the assets. For more information on trusts, click here.
6. Leave to charity
Gifts to charity are exempt from inheritance tax. On death, if you leave 10% of your net estate after exemptions to charity then the inheritance tax rate will be 36% instead of 40%. If you are already planning on leaving some of your estate to charity it might be possible to increase the gift to charity to 10% without detrimentally affecting your other beneficiaries, simply because of the reduced rate of inheritance tax payable. The rules around calculating whether the relief applies are complex so it is crucial you take professional advice.
7. Write life insurance policies in trust
If your life insurance is not written in trust then the likelihood is that it will pay out to your estate, increasing the amount of inheritance tax payable or even bringing a non-taxable estate above the tax threshold. By writing your insurance policies in trust they will pay out free from inheritance tax before probate is granted and your chosen trustees will have much more flexibility on how the funds are used. Advice should be sought to ensure writing a life policy in trust is the right thing for you and to ensure the terms of the trust are suitable.
8. Take advice on your pension
Some pensions carry inheritance tax free death benefits and many pensions can now be passed on free from inheritance tax. We are used to working with financial advisers to ensure that your pension is properly structured to best take advantage of this key inheritance tax saving.
9. Obtain financial advice
Some investments carry inheritance tax reliefs. You should seek financial advice to explore the potential ways of investing to avoid inheritance tax. We are able to work with your financial adviser to assist you in finding the right investment for you.
10. Maximising reliefs for business owners and farmers
Key reliefs from inheritance tax are available to business owners and farmers and should be maximised in any inheritance tax planning. We are experts in this field and can ensure that steps are taken to ensure the appropriate reliefs are available, allowing your business to continue after your death, or to optimise the value in the business for your family. By working closely with our company commercial team we can ensure that you receive complete advice tailored to suit your individual business. Find out more about passing on your business or farm.
If you want more information on how to avoid unnecessary inheritance tax, speak to a member of our specialist inheritance tax team today.
For a free initial telephone conversation call 01752 203500, email enqiries@GAsolicitors.com or use our online contact form.
