There are only two things certain in life: death and taxes. In the case of Inheritance Tax (IHT), that’s a whopping flat rate of 40% on all assets above the legal threshold – the current nil rate band applies to assets up to the value of £325,000.
If you’re estate is likely to be in excess of that, you may want to investigate ways to minimise your IHT exposure. We’ve compiled 4 simple tips that can help reduce the taxman’s cut for you to consider. Just one word of warning: The law is anything but straightforward with inheritance tax planning – and you are highly advised to discuss your particular case with a Chartered Accountant and/or solicitor with a specialism in estate planning.
- Set up a Trust
If you set up a Trust and put some of your cash, investments or property into it – meaning that neither you, your spouse or any of your children under 18 can benefit from – then the value of the Trust is deemed to be no longer part of your estate for IHT purposes. The Trust could be set up to pay for a grandchild’s education, or for the support of a family member who may have a disability.
It’s best to consult with your accountant if you’re thinking of setting up a Trust, either in your Will or outside of it, as some types of Trust are subject to their own tax regimes. In addition, the Trust itself might have to pay Inheritance Tax, and the trustees could be liable for Income Tax at a rate of 45%. As regards property in trust, there may be Capital Gains Tax (CGT) consequences if you transfer property into a trust, but CGT does not apply if you establish the trust in your Will.
The rules around Trusts are highly complex, so it’s best to take advice from a professional in tax matters.
- Give to family and friends
Gifting is a useful way to reduce your IHT liability but only if it’s done properly. If you gift money or possessions to a friend or a family member who is not your spouse or civil partner, and you no longer benefit from what you’ve given away, then the value of the gift will cease to be included in your estate for IHT purposes after a period of 7 years.
In addition, each year you can give away limited amounts free of any IHT liability. You can gift up to £3,000 a year, and also give money to your children and grandchildren when they get married. However, if during your lifetime, you give away assets in the form of property, there may be Capital Gains Tax to pay. Again, if you’re not sure, check with your accountant.
If you’re married or in a civil partnership, you can give anything you own to your spouse or civil partner as a gift, and your estate won’t have to pay Inheritance Tax on the value of the gift.
- Charitable donations
A good way to reduce the amount of Inheritance Tax you’ll have to pay is to leave some money to charity. Reducing your IHT bill while benefiting a good cause has a rather nice ring to it, don’t you think?
If you leave 10% or more of your entire estate to charity, it will reduce the amount of Inheritance Tax you pay on the rest – the applicable IHT rate is then 36% instead of 40%.
This may not appear to be a big saving, but it can mean that family and friends will receive more than they would have otherwise – and of course your favourite charities also benefit.
- Take out some life insurance
Be wise and take out an insurance policy on your life. This won’t reduce the amount of Inheritance Tax due on your estate, but the insurance settlement may make it a lot easier for your surviving family to pay the IHT bill.
The proceeds from the policy could prevent the family home from being sold to cover the Inheritance Tax bill. But if you do take out a policy, make sure the proceeds are paid directly into trust – if you don’t it will increase the size of your estate and more tax may be payable!