Understanding how to Reduce Inheritance Tax
With the current cost of living crisis and the recent budget, it is no wonder we are all looking at ways to save money.
During the tax year 2021 to 2022, HM Revenue and Customs received £6.1 billion of inheritance tax (IHT). This record receipt was an increase of 14% on the previous tax year.
Planning your estate now can help to reduce inheritance tax, ensuring that your money and assets can go directly to your loved ones in the future.
What is an inheritance tax?
IHT is a gifting tax that applies when you gift assets. It is normally associated with a tax on the estate when someone dies.
Currently, we each have a £325,000 inheritance tax-free allowance to be frozen until 2028. This is known as a Nil Rate Band. This allowance is transferrable between spouses and civil partners, giving a potential total of £650,000 inheritance tax-free allowance on the second death, a considerable amount to help reduce inheritance tax.
Assets over and above the allowance could be subject to a 40% tax, so it may be prudent to identify ways to reduce inheritance tax sooner rather than later.
There are important allowances and exemptions when gifting to charity, and some other organisations, which could also reduce inheritance tax further.
What is the Residence Nil Rate Band?
If your estate is less than £2m, you could also be eligible for an additional allowance known as a Residence Nil Rate Band which can also reduce inheritance tax. This is a sum of up to £175,000 each if you leave your family home to direct descendants, e.g. children grandchildren etc.
There are certain conditions to meet to ensure your estate qualifies and you should review your Will to ensure the provisions work with the allowance.
Should I just give it all away now?
You may be tempted to give your assets away now, but if you continue to benefit from the gift e.g., a property you still live in without paying market rent, the value of the gift could be brought back into your estate for IHT purposes.
You can gift up to £3,000 a year, and this allowance can be carried forward for a period if it is not utilised. There is also a list of gifts you can make in certain circumstances such as weddings etc so it is worth checking out more information on this on the government website combined these can significantly help to reduce inheritance tax.
You could also look at gifting from your regular income. If you were to do this, you would need to keep thorough records and evidence that this was not affecting your standard of life.
Many people are familiar with the saying ‘give and live’. Gifts above the £3,000 allowance are exempt from inheritance tax if you survive seven years from making the gift. If you don’t survive the full seven years from the date of the gift, there may still be a relief on a proportion of that gift. The amount will depend on how long within the seven-year period the gift was made. The rules on this can get more complicated if you have set up a trust.
How to Save on IHT
This is just a summary of some points you may want to consider when planning for the future and looking to reduce inheritance tax.
The first step would be to take proper advice on how your personal estate can be structured to utilise the allowances available to you whilst still directing your assets to your loved ones.
This is a complex area and it is good to look at regular planning to make sure your estate is structured in a way that works for you.
The experienced team at GA Solicitors is here to help and can offer important advice regarding inheritance tax planning.
If you would like to discuss this further, please contact me directly by emailing michelle.crump@GAsolciitors.com or call 01752 203500. Alternatively, use our online contact form.
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