There are a number of legal methods to help avoid inheritance tax in the UK. Here are 9 simple, tried and tested ways to get your inheritance tax bill down. These are time-tested methods that can be utilised toreduce or avoid inheritance tax and are HMRC compliant.
Use your allowances
There are numerous
different types of allowances, reliefs and exemptions which can help to reduce
your inheritance tax liability. These include:
·
the
nil rate band
·
the
residence nil rate band
·
annual
gifting allowances.
Make a will
Making a will is
one of the simplest and easiestways
to ensure your money goes to the people you want it to, for whatever reasons
you choose. It enables you to choose how your assets will be dealt with on
death, allowing you to plan your inheritance tax bill and minimise as much as
possible.
If you don’t make
a will, the government will dictate how your assets are shared (under the
intestacyrules). This will not be the most tax-efficient method.
Make gifts
Gifting is quite
often an overlooked but a great way of reducing the value of your estate when
it comes to inheritance tax. There is no cap on the number of gifts you are
allowed to make.
Giving away assets
whilst you are alive still needscareful
financial planning.
You need to calculate how much you can afford to give, while still making sure
that you have enough left to fulfil your own needs.
The structure of
the gift itself will determine just how much inheritance tax can be saved.
There are 2 forms of gifting, these are known as “chargeable lifetime gifts”
and “potentially exempt transfers”.
Use business relief
Certain types of
investments and businessesmay be eligible for “Business Relief”. This means
that some or all of the assets can be passed on tax-free.You can claim for
Business Relief, previously called‘Business Property Relief’, on certain types
of investments and businesses.
In order to
qualify for Business Relief, the government insist that the deceased must have
owned the qualifying assets for a minimum of 2 out of the last 5 years before their
death and at the date of their death.
Use your exemptions
Certain gifts are considered
as exempt from inheritance tax altogether.
These include:
·
Gifts
to spouses
·
Wedding
gifts
·
Annual
exemptions
·
Small
gifts
·
Gifts
to charities and political parties
Use life insurance
If you have taken
out a life insurance policy and die, your loved ones will receive thepayout. If
you failed to place the life in trust, unfortunately then inheritance tax will
be due.
Your life
insurance policy shouldbe written ‘in trust’ to separate and distinguish it
from your estate to avoid any chargeable inheritance tax. If done properly, the
final result is that your loved ones will be able to receive your entire estate
without any tax deduction.
You can either opt
to set up a ‘whole of life’ policy or ‘term’ assurance policy. A whole of life
policy pays out when you die, regardless of when you die. A term assurance
policy only covers you until a specific age. If you die within the set term, it
will be pay out.
Term assurance
policies tend to be lower in cost, as the risk of death occurring within the set
term is can notbe guaranteed. Of course, the longer the length of the term of
the policy, the higher the cost. As a general rule, whole of life insurance
policies do cost more, but they offer the reassurance of being guaranteed to
payoutupon your death.
The clear downside
of utilising life insurance is the cost. It can become rather expensive as you
get older. On a more positive aspect, is that insurance does provide a simple
solution whilst still keeping you in full control of your assets.
Invest tax-efficiently
With clever
planning and tax-efficient investing, you could effectively avoid inheritance
tax altogether. These investments are more complex though, that is why working
with an experienced financial advisor is crucial.
Use trusts
A trust is
effectively a completely separate legal entity. If you place your assets into a
trust, providing they meet specific requirements, they technically no longer
belong to you. As a result, assets placed in trust are not considered to bepart
of your estate for inheritance tax. Be aware though that the 7 year rule still
applies.
Utilising a trust delivers
a more complex way to minimise your inheritance tax liability. Dependant on the
type of trust, it enables you to retain some level of control over how the
money is utilised and specifically who benefits. However, you should know that
trusts do have their own tax charges and costs, and the inheritance tax
benefits may not be worthwhile.
Before you set up
a trust, you should speak to an independent
financial adviser.
They will advise you on the correct type of trust that meets your needs. They
will help you to decide the best type to minimise any inheritance tax, whilst
keeping other taxes and charges as low as possible.
Spend more
A simple strategy
to stop your estate from getting any bigger and creating a larger inheritance
tax bill is to spend more! Not only will this help to improve your lifestyle, it
will also help you ensure that you pay less IHT as you block your assets from getting
any bigger
However, finding a
good balance between spending today and making sure you are financially secure
tomorrow does need a careful level of planning.
Your overall objective
should be to make sure that you reduce your liability for inheritance tax,
whilst ensuring you don’t run out of money. Therefore, you should be conscious
not to deplete your assets too early. Having regular meetings with your
financial advisor will assist you in getting the right balance between enjoying
the present and being financially secure tomorrow.