Planning For Inheritance Tax

Inheritance tax can be a significant burden on your loved ones after you die.

Fortunately, there are steps you can take to minimise the effect that inheritance tax has on the beneficiaries named in your will.

This guide will explain how inheritance works and the techniques that can be used to avoid it.

What is inheritance tax?

Inheritance tax is a tax levied by the UK government on your estate once you have passed away.

It is applied on all of the assets you own including:

  • Cash in the bank
  • Property
  • Businesses you own
  • Vehicles
  • Investments
  • Insurance payouts

The government will tally the value of your assets then deduct any outstanding debts and tax allowances before calculating the tax that is owed.

If your estate is worth less than £325,000, you will not have to pay inheritance tax.

If you leave everything to your spouse or civil partner, a community amateur sports club, or a charity you also won’t have to pay inheritance tax.

However, you will still have to report the details to HM Revenue and Customs (HMRC).

Estates must pay 40% tax on anything above the £325,000 threshold.

However, the inheritance tax rate is reduced to 36% if you donate 10% or more to charity.

Changes to inheritance tax on the main residence

In 2015, Former Chancellor of the Exchequer George Osborne announced that the way inheritance tax was calculated on a family’s “main residence” would be changing.

This change increases the tax free threshold on homes that are passed from parents or grandparents to a direct descendent (children, step-children, or grandchildren).

The new thresholds are gradually being phased in and will eventually reach £1 million (£500,000 for singles) in 2020.

The changes only applies to a single home that is declared a main residence.

Currently (2017/2018), the main residence threshold sits at £125,000.

This is added to the normal £325,000 threshold, giving a total of £450,000.

It will increase by £25,000 until the total threshold reaches £500,000 (£1 million for couples).

This means that the current maximum amount that can be passed on tax-free is £900,000 for a couple (married or in a civil partnership), or £450,000 for a single person.

For properties worth between £1 million and £2 million, inheritance tax will be charged at the normal rate above the tax free threshold (40%).

Highly-valuable properties will begin to lose the main residence discount.

For every £2 of value above £2 million, £1 of the main residence discount is lost.

That means a property worth £2.35 million will not receive any benefit from the main residence discount.

How can you plan for inheritance tax

Fortunately, there are a number of tactics that you can employ to reduce the total amount of inheritance tax levied against your estate.

These simple actions can save your estate hundreds of thousands of pounds — ensuring that your beneficiaries gain as much as possible.

Give money to beneficiaries before you die

Any assets gifted to a friend or family member at least seven years before your death will not be included in your estate and won’t be affected by inheritance tax.

For example, if you gift your children £10,000 and live for a further ten years, it won’t be included in your estate and won’t be taxed.

However, there are some limits for how much you can give away.

Only £3,000 can be gifted each year, along with monetary gifts for children and grandchildren when they get married.

Larger gifts will attract inheritance tax.

Read more about gifts and exemptions from inheritance tax.

Gift assets to your partner

If you are in a civil relationship or married, you can gift some of your assets to your partner, making them unaffected by inheritance tax.

There are some limitations to this method and specific rules that apply if your spouse or civil partner’s permanent home is located outside the UK.

It is also possible for a person to pass your tax-free allowance to your spouse.

That means if you don’t use the entire £450,000 tax free threshold, the unused component can be added to your partner’s threshold.

Purchase life insurance

Although life insurance will be counted as a part of your estate and will be taxable, the additional funds it provides can still be quite useful for your family.

Your family can use the insurance payout provides to pay bills — including the inheritance tax bill.

Placing the funds from your life insurance payout into a trust is a useful technique that minimises the tax paid and helps your family deal with any significant bills.

Donate money to charity

Any assets that you donate to charity are free of inheritance tax.

If you leave at least 10% of your estate to charity, you will also reduce the inheritance tax rate on the balance to 36%.

This technique allows you to give more to your beneficiaries while also helping the community.

Thanks for reading Planning For Inheritance Tax.

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Stephen Coleclough

Stephen Coleclough is a leading international tax adviser who specialises in dealing with ultra high net worth individuals.

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