7 steps to reduce your inheritance tax bill
7 steps to reduce your inheritance tax bill
Inheritance tax is the highest it has ever been with the tax man taking more than £5 billion in the last year. Even though from April 2020 married couples could potentially pass on £1 million IHT free, the amount of IHT being taken is still expected to rise.
The seven steps to reduce your inheritance tax bill are:
- Making a will
Making a will is the simplest way of planning your estate and furthermore reducing your IHT liabilities, even though nearly two thirds of British adults do not have one. If your will is not well written and follows all of the guidelines, then your estate would be processed according to the rules of intestacy upon death. This means the tax man may take a larger amount of your estates and your beneficiaries may not get what they deserve from your estate.
- Give tax-free gifts
Each person is able to give a maximum of £3,000 per year tax free, this is known as the annual exemption, meaning it would not be considered for IHT purposes as long as it has been well documented. If you did not use the annual exemption in the previous year, then you can combine it with your current years allowance to gift up to £6,000 IHT free.
As well as the £3,000 allowance, there are also other gifts in which you can make which would fall outside of your estate. You can give up to £250 per person once per year to as many people as you wish as well as a wedding or civil ceremony of a family member (£1,000 per person, rising to £2,500 for grandchildren and £5,000 for great grandchildren).
If you leave 10% of your estate to charity, then you may qualify for a reduced IHT bill of 36% instead of 40%.
- Make larger gifts
You can make gifts to a value as high as you wish although you must live seven years after that gift has been made for it to fall outside of your estate. Gifts in excess of £325,000 are subject to a reduced rate of tax after 3 years – It is advised that you seek professional advice with this topic which we would be happy to help with.
- Set up a trust
When cash, property or investments are put into a trust, they essentially fall outside of the estate as they are no longer yours, they belong to the trust. Someone of your choosing will then look after that trust (a trustee); an example could be your children.
Trusts have the ability to significantly reduce your inheritance tax bill although there are tax and general laws which are very complex. Whatever decision you may make could actually be irreversible and you could shoot yourself in the foot if you do not get professional advice when setting it up and making any decisions. Assets placed in trust will only fall outside of your estate if you survive for 7 years after the trust is set up.
- Make sure your ISA is IHT free
When the ISA is yours and you are living, there is no tax to be paid but when you die and the ISA is passed on, your beneficiaries could be faced with a 40% IHT bill. To avoid this happening, ensure you are investing in certain AIM listed companies via your ISA. You will have to hold these shares for two years which you can then pass on to beneficiaries IHT free.
- Review your pension provisions
If you die before the age of 75, then you can pass on your pension IHT free. However, if you die after 75, then your beneficiaries will have to pay income tax on whatever amount they take out of the pension at their highest rate of income tax.
- Consider an IHT portfolio to retain full control of your assets
An IHT portfolio is a portfolio of companies which qualify for business property relief (BPR). It was initially introduced to allow entrepreneurs to pass their business down generations without the worry of IHT liabilities. The scope has now widened so it is possible for you to qualify for BPR even if you are not a business owner, but just an investor in a BPR qualifying company.
Here at Bluebond, we can help you plan your estate to mitigate any possibilities of an IHT bill. We can help you plan any of the above points to help you reduce your inheritance tax bill. Call us now for a free 30 minute consultation!
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