Six tips to save Inheritance Tax
Inheritance Tax was often viewed as being something only affecting the wealthy but now, with property values soaring, more and more people find that the potential value of their estate on their death is in excess of the Inheritance Tax threshold.
Inheritance Tax is charged at 40% on the value of estates over the threshold of £325,000 for an individual and £650,000 for married couples or civil partners. However, there are legitimate ways in which you can reduce or even wipe out any liability to Inheritance Tax and some of these are set out below:
- Make a Will & pass assets to your spouse or civil partner
By making a Will you can control how your assets are distributed and who you benefit.
If you are married or in a civil partnership then you can leave all your assets to your spouse or civil partner tax free. However, there are different rules if your spouse or civil partner is domiciled outside of the UK.
If you do not have a Will then your assets are instead distributed in accordance with the Intestacy Rules and can mean that your estate will pay Inheritance Tax unnecessarily. For example, under the Intestacy Rules, if you are married or in a civil partnership and have children, then the surviving spouse/civil partner will only inherit the personal property of the person who died and the first £250,000 of the estate and half the remaining estate. Inheritance Tax would be payable on the assets which are not inherited by the surviving spouse or civil partner.
- Give to charity or charities in your Will
If you leave an asset or a sum of money to a charity within your Will then the value of the gift is not taken into account when calculating the total value of your estate. In addition, if you leave at least 10% or more of your net estate to charity in your Will then the rate of Inheritance Tax payable on the remainder of your taxable estate can be reduced from 40% to 36%. This can save quite a substantial sum of money.
- Gifts to family and friends
There are several different ways that you can benefit family and friends during your lifetime.
Firstly, you can give a gift to someone and as long as you no longer get any benefit from the gift and survive for seven years after having made the gift, it will not be counted as part of your estate when you die.
Secondly, you can give cash or make gifts up to £3,000 (annual exemption) in total each tax year and these will be exempt from Inheritance Tax when you die. You can forward any unused part of the £3,000 exemption to the following year but then you must use it or lose it as only a maximum of £6,000 (annual exemption) is allowed.
There is also a small gifts exemption which means that you can give up to £250 each to any number of people each tax year as long as it is not the same person who benefited from the £3,000 annual exemption.
In addition to the annual exemption, each parent can give up to a maximum of £5,000 as a wedding gift to their child or each grandparent can give up to £2,500 as a wedding gift to their grandchild or £1,000 as a wedding gift to anyone else.
- Regular gifts from income
Any gifts that you make from your normal expenditure, that is money from your “after tax income” and not from your savings or investments can reduce the value of your estate. You could potentially buy Christmas and birthday presents in this way or assist certain family members who need maintenance or support including; your husband, wife or civil partner, your ex-husband, ex-wife or ex-civil partner, children under 18 or children in full time education, or another relative who depends on you financially. These gifts need to be regular and follow a clear pattern to qualify as exempt from Inheritance Tax.
- Create a trust
You can put some of your assets into a trust and they will no longer be part of your estate. For example, could create a trust to pay for your grandchildren’s education or to support a family member with a disability. There are many different types of trust which can be either set up in your lifetime or established in your Will. Rules for trusts are complicated and some types of trust need to pay Inheritance Tax themselves. Advice is essential to work out what you want to achieve and in order to select the trust which best works for you.
- Take out a life insurance policy
It is not always possible to completely avoid paying Inheritance Tax and so a life insurance policy can provide an alternative solution for paying Inheritance Tax when it is due. Inheritance Tax has to be paid within six months of death (interest is added after this time) and because probate must be granted before any money can be released from the estate, the executors may often have to borrow money to pay the tax bill or use their own funds. However, when making your Wills, a life insurance policy on both the husband’s and wife’s life could be taken out and written in trust so that the proceeds are payable only on the second death. The amount of cover should be equal to the expected Inheritance Tax liability and by putting it in trust it means that it does not form part of the estate.
- Spend it!!
Potentially the best tip of all!