How Do The Rich Avoid Inheritance Tax – 5 Simple Methods
When you pass away, you will probably want your estate to be transferred on to your children. Paying Inheritance Tax will significantly reduce the assets that they will end up receiving. Here are some ways of ensuring your children, and not the taxman, will benefit from your assets when you die.
1. Make a correct Will
A Will plays a significant role as it ensures that your assets are handed out in line with your wishes. Without making a Will, your assets would be distributed according to UK intestacy rules, and your assets might be liable to Inheritance Tax that could otherwise be protected.
It is essential to make a Will if you want to reduce your Inheritance Tax liability and also if you are worried about who will inherit your assets. Bear in mind that there’s no Inheritance Tax paid on assets passed between married partners on death.
2. Consider Equity Release
You may not be able to spend your wealth during your lifetime or make use of gifts if all your wealth is tied in your main residence. However, some people take out a lump sum equity release plan to get around this. You give the money to your children via a trust, which then makes an interest free loan to your descendants.
This free loan can be recalled in the event of a divorce, thus protecting the money in your family bloodline.
It is vital to remember that equity release can increase the debt that would count against your estate and reduce the assets you own. This means giving assets away earlier is right for you if you don’t need to access the money to meet your lifestyle.
3. Give Away Properties Which Are Free From Capital Gains Tax
If you have other assets that have decreased in value since buying (shares, properties, amongst others), you can pass them on, again via a trust, without having to pay CGT (Capital Gains Tax).
These assets in the value of any gain will be free from potential Inheritance Tax after seven years, and any property will accumulate in the estate of the recipient if gifted directly. Using trusts ensure the beneficiaries retain the assets in a case of divorce.
4. Take out a Life Insurance Policy
If you cannot avoid a potential tax bill by giving assets away, you can insure against the tax. Taking out Life Insurance is one of the simplest way of avoiding Inheritance Tax.
However, it is not the most effective way as the premiums over the years can be expensive. Provided the policy is registered into flexible trust on setup, the payout would not form a portion of your estate.
5. Use a Reversionary Discretionary Trust
After seven years, assets placed into a Reversionary Trust will not form part of your estate when you die, hence, avoiding Inheritance Tax.
The main benefit of a Reversionary Trust is that around 14.28% of the value of the assets gifted to the trust can revert to you in one year making them very flexible. So an investment of £300,000 into a Reversionary Trust would allow a return of capital of any amount from £1,000 to £42,857 in any one financial year.
If you want detailed information about avoiding IHT, please see our detailed information on How to avoid Inheritance Tax.