How to Reduce Inheritance Tax Bill

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Inheritance Tax is becoming a concern for more people in the UK. Only around 5% of people have to pay this tax when they inherit an estate. As property prices increase, however, it also increases the value of estates for many people. This can push them out of the nil rate tax band, which means that their beneficiaries will then have to pay 40% of what they inherit back to the government in tax. This is only something that you need to worry about if your total assets are worth more than £325,000. Here are a few ways to reduce Inheritance Tax bills if this affects you.

Make a Will that is Tax-Efficient

Making a will is an essential step for anyone thinking about what will happen to their assets when they die. Thinking about your own death can seem morbid, but it is necessary if you want to ensure that you can still provide for your loved ones after you have gone. You no doubt want your beneficiaries to be able to keep as much of their inheritance as possible. Though it will come with a fee, it is best to consult a solicitor and financial adviser to create a secure will. Inheritance Tax laws may have changed since you created your will, so make sure that it is up-to-date and reflects the current law. Getting professional financial advice is vital if you want your will to fulfil all of your wishes and be tax-efficient.

Give Gifts When Alive to Avoid Inheritance Tax

Making gifts of assets or money from your income while you are still living is one way to reduce Inheritance Tax by the time you do pass away. If you are helping to pay for the living costs of an ex-spouse or dependent such as an elderly relative or a child under 18 years old or in full-time education, this should be exempt. If you have a spouse or civil partner, then you can gift anything to them without Inheritance Tax applying. You can also give away gifts and assets to any other relative.

However, there are rules about when Inheritance Tax is applicable in this case. You can give away up to £3,000 per tax year, which does not count as part of your estate so will not be subject to Inheritance Tax. You can carry this allowance on for one more year if you did not use it in the previous year. It is also possible to give smaller gifts of up to £250 to as many individual recipients as you like without it counting as parts of your estate. You can also give wedding gifts that are exempt to a certain point. If it is your child’s wedding then you can give them up to £5,000, or up to £2,500 for a grandchild. If it is anyone else getting married, then you can give them up to £1,000. You must give this gift in advance of the wedding and the marriage must go ahead for it to count for exemption.

Gifting money while you are still alive can be a great way of improving your family’s life as well as your own. However, doing this should not impact on your own standard of living. If you make gifts outside of the allowances above, then they will count as potentially exempt transfers. Whether they will be subject to Inheritance Tax or not depends on how long you live for after making the gift. They will become exempt if you survive for 7 more years. If you die within 3 years, then the recipient will have to pay the full 40% of Inheritance Tax. There is then a sliding scale. If you pass away 3-4 years after giving the gift, the beneficiary must pay 32% in Inheritance Tax. This decreases to 24% for 4-5 years, then 16% for 5-6 years, then 8% for 6-7 years, and finally 0 for 7+ years.

Avoid Inheritance Tax by Putting Assets in a Trust

Putting your assets into a trust means that they are no longer a part of your estate. Therefore, Inheritance Tax will not apply to them. You can set up a trust while you are still alive, but transferring certain assets may incur Capital Gains Tax. You can avoid this tax by establishing a trust in your will instead. However, the trustee could become liable for Income Tax. You should get advice from a financial expert if you want to create a trust. This is one way of putting savings aside for younger beneficiaries.

Your cash, investments, and property will belong to the trust, and the trustee will have to manage them until the beneficiary is able to access them. You can stipulate when they are allowed to access the trust when you are setting it up. For example, you may only want your children or grandchildren to manage their money themselves once they turn 18, 21, 25, or any other age that you see fit. It is a way of keeping a lump sum aside that will be free from Inheritance Tax and also controlling when or how the beneficiary is able to spend your money. However, transferring assets into a trust will also be subject to the 7-year rule discussed above.

Leave Something to Charity to Reduce Inheritance Tax

Anything that you leave to charity when you die will be exempt from Inheritance Tax. If you leave at least 10% of the value of your estate to charity, then this will also reduce the Inheritance Tax that is due on the remainder from 40% to 36%. This might not seem like much, but it helps your family to keep more while also benefitting a good cause. This also applies for gifts to political parties or local sporting clubs. Any charity or group that you leave a donation to must be registered in the UK, though.

Take Out Life Insurance to Pay for Inheritance Tax

Taking out a life insurance policy will not reduce the Inheritance Tax applied to your estate. However, the payout that your family receives when you die could help to offset this amount. The life insurance payout must go into a trust, however, as it would increase your estate and the amount of Inheritance Tax due otherwise. If you pay the premiums for your life insurance yourself, then these count as gifts under the income exemption. The downside is that premiums can be very high. You must also be in good health, or HMRC will assume that you are dodging tax.

Adjust Inheritance Tax According to Property Ownership

If you share a property with a co-owner, you may be joint tenants. This means that if one owner dies, the other inherits 100% of the property. Alternatively, you and a partner could decide to switch to ‘tenants in common’ status instead. You then have the option of dividing the shares of the property differently and leaving each of your shares to somebody else. This reduces the value of your individual estates, thereby reducing the amount of Inheritance Tax due for them as well. You will need to see a solicitor if you want to do this. It can still be done after a partner dies.

Pay Into Your Pension Fund to Avoid Inheritance Tax

If you have a pension fund, then you can nominate heirs to receive the money Inheritance Tax-free if you pass away before using it. You must be under 75 years old when you die for them to be able to withdraw the money without paying tax. If you are over 75, then they will have to pay Income Tax on it, whichever way they choose to withdraw it. There are rules about how much you can pay into your pension per tax year. Seek legal advice if you want to make a large contribution into your pension fund. HMRC might consider this deliberate tax avoidance and treat the money as part of your estate anyway. You will need to discuss what will happen to your pension, depending on the type of fund that you have.