Inheritance Tax Planning: What You Need to Know

inheritance tax planning

When you’re planning your finances, inheritance tax should not be ignored. In this article, we’ll look at the basics of what you need to know and when you should ask for help and advice.

The Basics of Inheritance Tax

Inheritance tax is due when your estate is over £325,000 and it’s not passed to your spouse or a charity. The rate of inheritance tax is currently 40% above £325,000. The tax will be paid by the executor of your estate.

However, there are several ways to reduce your inheritance tax bill if you plan ahead.

How to Reduce Your Inheritance Tax Bill

Leave Your Estate to Your Spouse

If you leave your estate to your spouse in your will inheritance tax is not due, even if it’s worth over £325,000.

What’s more, you can also benefit from an extra allowance that lets you leave your home to your family tax-free. If you pass on your home to a child or grandchild (the allowance only applies to direct descendants), there’s a nil-rate band of £175,000. This is on top of the standard inheritance tax allowance of £325,000.

As a result, you can leave as much as £500,000 tax-free yourself or £1 million as a couple.

Make Gifts to Family and Friends

Gifts to friends and family are another way to lower inheritance tax.

Gifts of up to £3,000 each year during your life don’t count towards inheritance tax. Whilst gifts above £3,000 can count towards inheritance tax if you die within 7 years of making the gift.

When you first make a gift it’s known as a Potentially Exempt Transfer (PET). This gift is free from inheritance tax if you live for 7 years.

However, if you pass away before the end of the 7 years, the PET becomes a Chargeable Lifetime Transfer (CLT) and forms part of your estate.

Create a Trust

A trust can protect cash, assets or property by moving them out of your estate, so they no longer count towards inheritance tax.

You can use a trust as a way to prevent a PET becoming a CLT. In other words, if you make a gift into a trust, rather than to an individual, you can avoid it being liable for inheritance tax if you pass away within 7 years.

Trusts are a complex area though, so it’s best to seek professional advice and help to create a trust.

Leave Money to a Charity

Any money you choose to leave to a charity is free of inheritance tax.

Also, if you leave over 10% of your estate to charity, this reduces the inheritance tax you pay on the rest of your estate from 40% to 36%.

Take Out Life Insurance

A life insurance policy can help your surviving family pay an inheritance tax bill on your estate.

However, unless the life insurance policy is placed in a trust it simply makes your estate larger and so increases the inheritance tax bill. Seek professional advice on how to set up a trust for your life insurance policy.

If you would like to speak to us about advice on financial planning please email us [email protected].

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