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How To Reduce Your Inheritance Tax And Pass On Wealth

Understand the ins and outs of inheritance tax

Understand the ins and outs of inheritance tax

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How To Reduce Your Inheritance Tax And Pass On Wealth

Are you worried about inheritance tax? This article will help you to understand the ins and outs of inheritance tax and how to reduce the amount your family will pay when you pass on your wealth. 

If you are concerned about how much your estate will be taxed in the event of your death, then it’s a good idea to start inheritance tax planning early.  This article will detail how to plan for this, and give you the tools to safeguard your financial legacy. 

Understanding Your Inheritance Tax Liability

Inheritance tax is a charge surviving family members have to pay on the estate of someone who has died. The estate includes their property, money, investment assets, and possessions. 

Anyone whose estate is worth more than £325,000 will be taxed 40% on anything over that amount. Anything below this threshold is in the ‘nil band’ rate, meaning you do not need to pay inheritance tax on that amount.

If your inheritors are considered a ‘lineal descendant’ then you could be eligible for the ‘residence nil rate band’, which offers an additional £175,000 untaxed inheritance for your family. This goes up each year in line with inflation. 

If you decide to gift your family some of your estate, then you need to be careful how you do this. Gifts given 3 years before your death will still be taxed at 40%. However, the tax amount tapers off between 3 and 7 years before your death. This is generally known as ‘taper relief’. If you gift portions of your estate more than 7 years before you die, this will not incur inheritance tax.

If you are married or in a civil partnership, the remaining spouse is generally exempt from inheritance tax, regardless of the overall value of the estate. This is because it is all considered ‘household’ ownership. The nil-band rate for the spouse who has passed away will transfer to the surviving spouse, effectively doubling the zero-tax threshold for inheritance when they also pass away. 

To find out if an estate is under or over the nil-rate band threshold, you need to calculate the value of all assets (investments, properties, etc.), gifts made within the 7 years before death, and the value of any trusts that hold beneficial interest for the estate owner. You can use the government inheritance checker, or set up a consultation with a financial adviser

Strategies for Minimising Your Inheritance Tax Bill

Working out how to reduce your inheritance tax bill can be tricky. But, using some actionable strategies, you can begin minimising the taxable amount. This will allow you to pass on more and reduce the overall bill. 

The Role of Gifts and Exemptions in Reducing Inheritance Tax:

Gifts are a great way to pass along wealth whilst you are still alive. However, as mentioned before, this can be a problem if you gift anything within 7 years before your death. 

There are some ways to get around this. 

  • You have an annual allowance of £3000 to gift to someone whilst still alive without it being included as an inheritance. This is known as an ‘annual exemption’. By setting up annual gifts, you can slowly gift away your estate value in small chunks. 
  • You have an unlimited allowance for gifts worth £250 or less, although this cannot be given to anyone who has received your £3000 gift. 
  • You can gift £5000 to a child, or £2,500 to a grandchild as their wedding gift. 
  • You can gift funds to help with the living costs of an ex-spouse, a child dependent under 18, or in full-time education, or an elderly dependent.
  • You can also gift money from your surplus income, however, this is much more complex and you need to have detailed records of regular, consistent payments. 
  • Of course, any larger sums of money are considered ‘Potentially Exempt Transfers’. If they occur 7 years before your death then they are no longer part of your estate. If you die before the 7 years is over, then the larger gifts will become a chargeable transfer and will incur inheritance tax. 

Leveraging Trusts for Inheritance Tax Efficiency:

Another way to increase the efficiency of your inheritance is to leverage a trust to manage your money for the benefit of the person you wish to inherit. The trust is a legal agreement which can include savings, property, or investments. 

Technically, once in a trust, these assets belong to the trust and won't be counted among your estate value. When it comes to your inheritance tax bill, you can pass some of your estate on through a trust and reduce the big bill. 

Investment in Inheritance Tax Efficient Assets:

Whilst most of your assets are included as part of your estate, there are a few assets that do not get included.

  • Most Pensions are not included and can be paid to beneficiaries in a lump sum or instalments after your death. 
  • AIM investments are another method of investing in a tax-efficient way. You can receive ‘business relief’ by holding a diversified portfolio of holdings known as an AIM portfolio. This type of portfolio can give you capital growth and dividend income. 
  • Life insurance is not taxed as part of your inheritance, paying into a life insurance policy will ensure your beneficiaries will receive an untaxed payout on your death. 

These are all complex ways to reduce and reduce inheritance tax implications on your estate. However, if you are planning to utilise any of the strategies mentioned in this section, please seek professional expert advice. Check out The Openwork Partnership for all your inheritance tax needs

How to Reduce Inheritance Tax After Death: Immediate Steps

Thinking about how to pass on your wealth and reduce the infamous inheritance tax is something you can start immediately. Set up a meeting with a financial expert to: 

  1. Leverage tax exemptions, such as claiming refunds on overpaid tax.
  2. Think about deeds of variation, allowing beneficiaries to redirect their inheritance into better, more tax-efficient forms of payment. 
  3. Make sure that you are aware of all post-death exemptions and reliefs. A financial expert can help you work out if you qualify for agricultural or business relief. 
  4. Set up consistent and regular ‘surplus income’ payments to your family members.
  5. Utilise your tax-exempt annual gift allowance.

Final Thoughts on Inheritance Tax Planning

Inheritance tax planning can be a very frustrating aspect of passing on wealth to your family. It has direct implications for your beneficiaries, which you have no control over once you have passed away. 

To help reduce the impacts that inheritance tax causes, there are numerous strategies to pass on wealth early, or remove assets from your estate so they are not considered part of the overall total. If you can reduce your wealth to under the threshold amount, then you might ease the tax implications for your family in the event of your death. 

For anything related to inheritance tax, you should use a financial services company to assist you with the complexities. The Openwork Partnership is always happy to help, and you can reach out to them today to get more personalised insights on reducing your inheritance tax. 

HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.

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