If your estate is sufficiently large, you will need to pay inheritance tax after you pass away. Inheritance tax (IHT) is a tax imposed on the estate of someone who has passed away. Your estate generally consists of all your property, savings, investments and other assets, minus the value of any debts and funeral expenses.
There are several ways, all legal, to help reduce or eliminate the inheritance tax charged on your estate, from giving gifts while alive to leaving money to charity. This month, we list five options to help minimise your inheritance tax.
But, First, What is the Rate of Inheritance Tax?
The standard IHT rate is 40% and it is only charged on the part of your estate that exceeds the tax-free threshold (currently frozen at £325,000 until April 2028).
While many estates are not large enough to incur inheritance tax, for estates worth more than £325,000, this places quite a burden on your estate and your beneficiaries.
Read on to learn our five tips to reduce its effect on your estate.
1. Make Gifts During Your Lifetime
One of the simplest things you can do to avoid paying IHT is to spend or give away your money during your lifetime. No tax is payable on any gifts you give, so long as you survive seven years after gifting them.
If you do pass away within seven years of making the gift, the IHT amount may be reduced by taper relief. For example, if you survive just over four years after making the gift, the IHT your estate will pay on that gift will be reduced to 24%.
Each tax year, you can give up to £3,000 worth of gifts, split between however many people you like – this is known as your annual exemption. You do not have to survive seven years for these gifts to be exempt from IHT. You are also permitted to make unlimited gifts of £250 to others too - so long as you have not used another allowance for the same person.
In relation to weddings, you can give up to £1000 as a gift without stressing about inheritance tax. This amount can be greater for relatives – up to £5,000 for your children and £,2500. However, you need to give the gift before the wedding and the wedding must go ahead for the gift to be exempt from IHT. Otherwise, the gift will be a potentially exempt transfer, and will only be exempt from tax if you survive seven years.
However, if your gifts are above these thresholds, they will be considered part of your estate and may be taxable if you don’t survive seven years after making them.
You should also be mindful that you cannot continue to benefit from that gift that you have given, for example, you can’t continue to live in the house that you gifted to your daughter, otherwise, it will still count as part of your estate.
2. Leave Money to a Charity
Money left to any UK-registered charity, political party or local sports club will always be free from inheritance tax. In addition, if your charity donation amounts to more than 10% of your taxable estate, the inheritance tax rate for the rest of your estate will fall from 40% to 36%.
The charity donation only needs to be 10% of the amount of your estate that exceeds the IHT threshold of £325,000 for this reduced tax rate to apply. So, for example, if you were leaving behind £525,000, you would benefit from the lower rate if you gave more than £20,000 (10% of the amount over £325,000).
In some situations, giving money to charity could actually reduce the amount of IHT payable, while your loved ones still receive the vast majority of your estate. However, this will depend on the size of your estate and donation; it is therefore important to seek advice before using charity gifting as estate planning.
3. Leave Your Estate to Your Spouse
Your spouse or civil partner will never have to pay tax on assets you leave them, irrespective of the amount. Making the most of this in your will can save your family a lot of money. When your spouse passes away, they will have inherited your unused IHT allowance, which will potentially allow them to pass on up to £650,000 tax-free.
4. Use Property Allowances
If you bequest your home to your children or grandchildren in your will, property allowances will boost your tax-free threshold by £175,000 for the current tax year (to make it a total of £500,000). To qualify for this, however, you must have owned and at some point lived in the property, on or after 8 July 2015.
A married couple who merge their allowance and leave their home to their children or grandchildren can effectively pass on estates of up to £1,000,000 completely free of IHT.
5. Make a Will
Writing a will is a key part of inheritance tax planning and will help you to reduce your potential IHT liability and make the most of the above tax-saving methods.
It is important to keep your will up to date as your financial and family situations change so you can reduce the amount of inheritance tax that your estate is burdened with.Making a will and thinking about estate planning can be a daunting prospect but our specialist wills team are on hand to help. Whether you are looking for further advice on inheritance tax planning or would like to find out more about our expert wills drafting services, contact us on 0330 173 3041 or email us today.
