How to Avoid Inheritance Tax and Decrease Inheritance Tax in the UK

The United Kingdom Inheritance Tax (IHT) is charged on estates over £325,000 ($500,000). This includes properties, cash, investments, pensions, shares, and life insurance policies. If there is no one left to inherit the property, it goes into a trust fund where it cannot be taxed again. However, if someone inherits the asset, they must pay IHT.

There are several ways to avoid inheritance tax. One way is to gift assets to loved ones before death. Another option is to sell the assets in question before death. You can also use trusts to pass assets to beneficiaries without incurring IHT. Finally, you can set up a discretionary trust to allow you to benefit from the trust while avoiding paying IHT.

A professional financial adviser can help determine what options are best for you. They can advise you about the pros and cons of each option, and recommend the most suitable solution.

What is Inheritance Tax?

Inheritance tax is a tax paid by the recipient of an inheritance. This tax is levied on the total value of the assets in the estate, including property, cash, shares and investments.

The amount of tax depends on whether the estate is worth less than or more than £325,000. If it is over £325,000, then you are subject to capital gains tax on the difference between the original cost of the asset and its market value today.

Your estate will be taxed according the net value of the estate after debts and taxes have already been deducted.

What assets comprise your estate?

If you die without a Will, your estate will go into administration. This means that your assets will be sold off and distributed among your beneficiaries. If you don’t want this to happen, you’ll need to make sure that everything you own is protected.

You could include assets such as cash, shares, property, pensions, and investments. But there are some things that aren’t covered by normal inheritance rules. These include items like artwork, antiques, jewellery, and collectibles. You might also consider including items that are jointly owned with someone else.

The value of each asset needs to be calculated. For example, if you own half of a house worth £100,000, you’d need to add 50% of the current market value (£50,000). So, if you’re considering adding something to your estate, take a look at our guide to calculating the value of your estate.

What assets are not included in your will?

Assets held in trust or pension plan are excluded from an individual’s estate for inheritance tax purposes, meaning they do not go into the estate and therefore cannot be inherited. This includes life insurance policies held in trust, annuities owned by a person under age 59 ½, and retirement accounts such as IRAs, 401(k), 403(b) and 457 plans.

Funeral expenses are deductible against the estate for income tax purposes, meaning the cost of the funeral is deducted from the gross estate. If you die during the calendar year, the deduction is taken out of taxable income.

Life Insurance Policies Held In Trust Are Exempt From Inheritance Tax

If you hold a life insurance policy in a trust, it is exempt from inheritance taxes. You must pay premiums to maintain coverage, however, and there is no guarantee that the beneficiary will receive proceeds upon your death.

What is the seven-year rule for estate tax purposes?

The year rule applies if the deceased person dies within three years of making a gift. This includes gifts made during the seven years prior to death.

If you make a gift before 2007, the year rule applies. You must wait seven years before claiming the exemption.

If you die 7 years or longer after making the gift, it will be completely exempt from inheritance tax. However, if you die less than 7 years after making the gift, you may still claim the full value of the gift.

When must the inheritance tax be paid?

Inheritance tax is charged on estates worth over £325,000 ($400,000). You don’t have to pay it if you’re under 18, or if your estate is less than £325,000. However, there are penalties for late payment. This article explains how to avoid paying inheritance tax.

Residential status and IHT

Inheritance tax is one of those things that most people know about, but don’t really understand. This video explains what inheritance tax is and how it works.

If you’re a UK resident, you’ll probably want to watch this video before April 17th – otherwise known as ‘Death Day’ – because it could effect your estate.

The video explains what residential status is and why it matters. If you die without having lived anywhere else, you lose your residential status and therefore your assets aren’t taxed.

What is the rate of British inheritance tax?

The current UK inheritance tax rate is 40%. However, there are ways to reduce the level of inheritance tax payable.

Inheritance tax is charged on the value of assets left behind at death. This includes property, investments, cash, shares, pensions and life insurance policies.

If you die without having paid enough inheritance tax, HM Revenue & Customs (HMRC) can reclaim money it thinks you owe.

There are different types of inheritance tax depending on whether you inherit land, buildings or personal possessions.

For example, if you inherit £1 million worth of property, you could face up to 50% inheritance tax. If you inherit less than £100,000 worth of personal possessions, however, you won’t have to pay anything.

You don’t even have to be a resident of the UK to pay inheritance tax. You just have to be domiciled here – i.e. where you live permanently.

To find out what your inheritance tax liability is, speak to our experts today. We’re always happy to help.

How to reduce Inheritance Tax Payments

Inheritance tax is one of those things you hear about but don’t really understand. You know it exists, but you’re not sure how it works. And even though it sounds like something that happens to other people, it could affect you too. So we’ve put together some information on what inheritance tax actually is and how it affects you.

What Is Inheritance Tax?

The Inland Revenue collects inheritance tax on estates worth over £325,000. This money goes into the Exchequer’s coffers. Inheritance tax is based on the value of the estate at death. If someone dies with no assets, there won’t be any tax due. But if someone leaves behind a large amount of property, that property will be subject to tax.

There are three main types of inheritance tax: Capital Gains Tax; Gift Aid; and Inheritance Tax.

Capital Gains Tax

Capital gains tax is charged on profits made on investments such as shares and property. If you sell a house for a profit, capital gains tax applies. If you buy a house for £100,000 and later sell it for £150,000, capital gains tax will apply. If you invest £10,000 in a stock market fund and make a £5,000 gain, capital gains tax will be applied.

Gift Aid

Make a will

Making a will is one of the easiest ways to protect yourself against paying inheritance tax. A will is a legal document that states how your estate will be distributed after your death. If you don’t make a will, then the state decides what happens to your property. This could mean that your family members receive nothing, or it could mean that they receive everything.

Wills are a great way to ensure you avoid paying too much inheritance tax. You can set up a trust in your Will that lets you pass on assets without having paid inheritance tax. Trusts are used for many different reasons. They can help people who want to keep some of their money separate from their children, or they can provide financial support for someone who needs it.

Setting up a trust in your WILL allows you to pass on your assets without having to pay inheritance tax. However, there are times when changing the beneficiaries of your Will can save your family from paying Inheritance Tax. For example, if your partner dies, you might choose to change the beneficiary to your children rather than your spouse. This helps reduce the amount of Inheritance Tax that your family pays.

There are times when changing the Beneficiary of your Will can save family from paying Inheritance tax.

Use your allowances

You might think that giving away thousands of pounds to your loved ones is a great way to make sure they always have enough money. But it could actually end up costing you dearly. Here’s how to use your allowance to help keep your finances under control.

Your nil rate band is £350,000. If you earn over £150,000 per annum, you can apply for a nil rate band. This allows you to transfer property without paying stamp duty. A nil rate band does not mean that you don’t pay tax – you still do. However, there are some exceptions. For example, if you sell a house within three years of buying it, you won’t have to pay capital gains tax.

You can increase your nil rate bands by setting aside money into trusts. These trusts must be set up in England, Wales and Scotland. They allow you to pass on assets to beneficiaries without having to pay inheritance tax.

There are other allowances available including residence nil rate band. The residence nil rate band is £100,000. This means that you can transfer residential property without paying stamp duty, subject to certain conditions.

Use your allowances wisely

Don’t gift too much money to family members. Instead, consider making charitable donations. Charities such as Gift Aid can reduce your income tax bill.

If you want to give money to your children, you can either gift them cash or buy them shares. Shares are better because they usually appreciate in value. However, gifts of cash are exempt from inheritance tax.

Use your exemptions

Giving cash gifts to newlywed couples is one way to avoid inheritance tax. If parents and grandparents want to help out their children and grandchildren, it could make sense to give them money now rather than waiting for them to inherit. This gives the recipient less time to spend the money and makes it harder to put towards savings or investments.

Parents and grandparents can give away up to £10, 000 tax free. They don’t have to pay income tax on the amount they donate, although they do have to pay capital gains tax when selling the items.

Small gifts should be given to close friends or relatives. These people won’t feel obliged to return the favour, and they’ll appreciate the thoughtfulness behind the gift.

Gifts over £250 require an “exemption certificate”, which must be obtained before making the donation. Exemptions certificates are available online from HM Revenue & Customs (HMRC).

The gift recipient can claim back 20 per cent of the value of the item if he sells it within 12 months. He doesn’t have to declare the sale, however, as long as he keeps records of the transaction.

Use business relief

Business Relief allows you to pass assets onto your beneficiaries without having to pay inheritance tax. This is because it is considered part of your estate. However, there are different types of investment scheme available for Business Relief. These include:

* Investment Trusts – where shares are held in trust for the benefit of investors;

* Unit Trusts – where units are bought and sold on behalf of investors;

* Private Placement Schemes – where shares are offered privately to individuals or companies;

* Company Shares – where shares are owned directly by the company itself.

To qualify for Business Relief, you must have been involved in the running of the company for at least 2 out of 5 years prior to death. You cannot be employed by the company.

Use life insurance

Term Assurance Policies

Whole of Life Policies

Life Insurance

You don’t have to pay monthly premiums with term insurance; however, you do have to make one payment up front. With whole of life policies, you’ll pay premiums every month, but you won’t have to worry about paying those premiums for the rest of your life.

Term Assurance Policies vs. Whole of Life Policies

Term insurance policies are less expensive than whole of life policies because you only pay for what you use. If you die during the policy period, there’s no payout. However, if you survive the entire term, you’re covered.

Use trusts

A trust is a legal structure that allows you to separate assets from yourself. You can use it to protect your assets against creditors, divorcees, or even death.

Trusts are used in many countries around the world. In some cases, you might want to avoid taxes because of the benefits of trusts.

There are several kinds of trusts, each with different rules and regulations. Each type of trust has advantages and disadvantages.

The most common form of trust is called a “revocable living trust.” This is a trust where you make decisions about how the money is spent while you’re alive. After you die, the trustee distributes the money according to your wishes.

Other forms of trusts include:

* Irrevocable living trusts – An irrevocable trust is one where you cannot change your mind later. If you do decide to revoke the trust, the property goes into probate court.

* Revocable trusts – With a revocable trust, you can control the distribution of your assets after you die. However, once the trust is established, you cannot change your mind.

Invest tax-efficiently

Gift and loan trusts are often used to help people manage their estate planning. These trusts offer an effective way to reduce what is known as “immediate” inheritance tax – the tax paid when someone dies. This is because the value of the assets held within the trust is counted as part of the deceased person’s estate, rather than being included in the beneficiaries’ inheritances. As such, it avoids paying inheritance tax twice.

The government introduced a new Inheritance Tax Act in April 2017, which changed the rules around gifting and loans. Previously, gifts could be given up to £1 million without incurring any inheritance tax. However, the new law increased the limit to £2.5 million per individual, meaning that anyone wishing to make large donations will now need to consider gifting and loaning trusts.

A gift and loan trust provides an effective way to reduce inheritance tax payable. The trust enables you to set aside money for your children, grandchildren or other relatives, while still benefitting from the tax relief. You can choose to repay the loan at any time before you die, even before your death. If you do wish to repay the loan, the trust pays out the balance due to your beneficiary(ies).

You can choose whether to receive regular monthly payments, quarterly payments, or annual payments.

An immediate inheritance tax saving can also be achieved through a discounted gifting trust. This type of trust reduces the overall size of the estate, thereby reducing the amount of inheritance tax owed.

Spend more

The government says it wants people to save more money for retirement – but how much do you really need to retire comfortably?

If you’re planning to retire early, you’ll want to make sure you’ve got enough savings to live off while you work. But what exactly does “enough” mean? And how much do you actually need to set aside each month?

We’ve put together some tips to help you figure out just how much you need to save.

1. How old are you?

How long you plan to live depends partly on how old you are now. If you’re young, you might still have decades ahead of you where you can enjoy spending your pension pot. On the other hand, if you’re older, you may already have a shorter window of opportunity to build up a comfortable nest egg.

2. What’s your current salary?

Your annual income determines how much you can afford to spend once you stop working. So start by calculating your gross monthly pay. This includes your basic wage plus any overtime payments, bonuses, allowances or commission you receive.

Frequently Asked Questions

Who is exempt from Inheritance Tax?

If you’re single, widowed or divorced, there’s no Inheritance Tax payable on any gift you make while you’re alive. If you’re married or in a civil union, it depends what you’ve got. If you’re giving away property worth less than £325,000, you don’t owe anything. But if you’re gifting something worth over £325,000, then you’ll have to pay tax on the value of the item. So how do you know whether you’re paying Inheritance Tax?

There’s no Inheritance Tax due on gifts between spouses or partners. And even if you’re a civil partner, you won’t have to pay Inheritance Tax on gifts up to £325,000 if you die within three months of each other. This includes gifts of cash, shares and property.

You can also give away assets without having to pay Inheritance Tax. For example, you could give money to charity or donate items to a museum. Gifts to political parties aren’t subject to Inheritance Tax either. However, if you want to give away your home, you’ll have to pay Inheritance Taxes.

And finally, if you’re married or in civil partnership, you might think that you don’t have to pay Inheritence Tax on gifts to family members. But if you’re giving away items worth more than £325,000 – such as jewellery, paintings or antiques – you’ll have to pay inheritance taxes.

How Gift Inheritance Tax is Paid

If you make a gift during your lifetime it doesn’t count towards your taxable income. However, once you die, the gift becomes part of your estate and could potentially trigger inheritance tax. If you give away more than about £325,000 over seven years, any additional amount gifted to beneficiaries in the final three years of life will be subject to Inheritance Tax. This includes money donated to charity, such as a donation to a good cause or to a church.

The government says that people who inherit more than £325,001 worth of property are liable for Inheritance Tax. But what does this mean? In theory, someone inheriting a house worth £1 million should pay around £40,000 in tax. However, there are some exemptions to the rules, including giving away gifts up to £325,000.