How do I pay less Inheritance Tax?

How do I pay less Inheritance Tax?

 There are a number of legal methods to help avoid inheritance tax in the UK. Here are 9 simple, tried and tested ways to get your inheritance tax bill down. These are time-tested methods that can be utilised toreduce or avoid inheritance tax and are HMRC compliant.

 

Use your allowances

 

There are numerous different types of allowances, reliefs and exemptions which can help to reduce your inheritance tax liability. These include:

·        the nil rate band

·        the residence nil rate band

·        annual gifting allowances.

 

Make a will

 

Making a will is one of the simplest and easiestways to ensure your money goes to the people you want it to, for whatever reasons you choose. It enables you to choose how your assets will be dealt with on death, allowing you to plan your inheritance tax bill and minimise as much as possible.

 

If you don’t make a will, the government will dictate how your assets are shared (under the intestacyrules). This will not be the most tax-efficient method.

 

Make gifts

 

Gifting is quite often an overlooked but a great way of reducing the value of your estate when it comes to inheritance tax. There is no cap on the number of gifts you are allowed to make.

 

Giving away assets whilst you are alive still needscareful financial planning. You need to calculate how much you can afford to give, while still making sure that you have enough left to fulfil your own needs.

 

The structure of the gift itself will determine just how much inheritance tax can be saved. There are 2 forms of gifting, these are known as “chargeable lifetime gifts” and “potentially exempt transfers”.

 

Use business relief

 

Certain types of investments and businessesmay be eligible for “Business Relief”. This means that some or all of the assets can be passed on tax-free.You can claim for Business Relief, previously called‘Business Property Relief’, on certain types of investments and businesses.

 

In order to qualify for Business Relief, the government insist that the deceased must have owned the qualifying assets for a minimum of 2 out of the last 5 years before their death and at the date of their death.

 

Use your exemptions

 

Certain gifts are considered as exempt from inheritance tax altogether.

 

These include:

·        Gifts to spouses

·        Wedding gifts

·        Annual exemptions

·        Small gifts

·        Gifts to charities and political parties

 

Use life insurance

 

If you have taken out a life insurance policy and die, your loved ones will receive thepayout. If you failed to place the life in trust, unfortunately then inheritance tax will be due.

 

Your life insurance policy shouldbe written ‘in trust’ to separate and distinguish it from your estate to avoid any chargeable inheritance tax. If done properly, the final result is that your loved ones will be able to receive your entire estate without any tax deduction.

 

You can either opt to set up a ‘whole of life’ policy or ‘term’ assurance policy. A whole of life policy pays out when you die, regardless of when you die. A term assurance policy only covers you until a specific age. If you die within the set term, it will be pay out.

 

Term assurance policies tend to be lower in cost, as the risk of death occurring within the set term is can notbe guaranteed. Of course, the longer the length of the term of the policy, the higher the cost. As a general rule, whole of life insurance policies do cost more, but they offer the reassurance of being guaranteed to payoutupon your death.

 

The clear downside of utilising life insurance is the cost. It can become rather expensive as you get older. On a more positive aspect, is that insurance does provide a simple solution whilst still keeping you in full control of your assets.

 

Invest tax-efficiently

 

With clever planning and tax-efficient investing, you could effectively avoid inheritance tax altogether. These investments are more complex though, that is why working with an experienced financial advisor is crucial.

 

Use trusts

 

A trust is effectively a completely separate legal entity. If you place your assets into a trust, providing they meet specific requirements, they technically no longer belong to you. As a result, assets placed in trust are not considered to bepart of your estate for inheritance tax. Be aware though that the 7 year rule still applies.

 

Utilising a trust delivers a more complex way to minimise your inheritance tax liability. Dependant on the type of trust, it enables you to retain some level of control over how the money is utilised and specifically who benefits. However, you should know that trusts do have their own tax charges and costs, and the inheritance tax benefits may not be worthwhile.

 



Before you set up a trust, you should speak to an independent financial adviser. They will advise you on the correct type of trust that meets your needs. They will help you to decide the best type to minimise any inheritance tax, whilst keeping other taxes and charges as low as possible.

 

Spend more

 

A simple strategy to stop your estate from getting any bigger and creating a larger inheritance tax bill is to spend more! Not only will this help to improve your lifestyle, it will also help you ensure that you pay less IHT as you block your assets from getting any bigger

 

However, finding a good balance between spending today and making sure you are financially secure tomorrow does need a careful level of planning.

 

Your overall objective should be to make sure that you reduce your liability for inheritance tax, whilst ensuring you don’t run out of money. Therefore, you should be conscious not to deplete your assets too early. Having regular meetings with your financial advisor will assist you in getting the right balance between enjoying the present and being financially secure tomorrow.

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