Losing a loved one is always a sad time, but by using our inheritance tax planning guide featuring the top ten ways to help reduce inheritance tax liability for your beneficiaries, you can ensure their loss is no greater than it has to be.
- How Inheritance Tax Works
- Online Inheritance Tax Calculator
- 1. Get Married
- 2. Give To Charity
- 3. Pass On Your Assets Early
- 4. Write Your Life Insurance Policies Into Trust
- 5. Offer Your Own Deed of Variation
- 6. Force Someone Else To Tie The Knot
- 7. Invest In Mother Nature
- 8. Manage Your Pension Correctly
- 9. Spend It
- 10. Insure Against It
- The Way Forward
How Inheritance Tax Works
When you die the Government will assess how much your estate is worth, deducting any outstanding debts or liabilities.
All value that then exceeds the ‘nil-rate threshold‘ becomes liable to inheritance tax of as much as 40%. This liability is then payable to the Government before any monies are issued to your beneficiaries.
IHT Liability Illustration
Most people assume that their assets are not going to reach the threshold, currently set at £325,000 in the financial year 2013/2014 (source: HMRC). However when you consider that the Government will take into consideration all cash in the bank, the value of any property owned, in joint or sole names, as well as any businesses or investments made before debts are deducted, the standard person in today’s society is likely to leave behind a much greater liability than they first thought.
With careful inheritance tax planning there are ways to ensure that the tax liability on your estate is minimised so that more of your assets can pass directly to those for whom it was intended, and there is much less value erosion on your estate as a whole.
Online Inheritance Tax Calculator
Please use our IHT calculator below to work out your IHT liability
This is a generic calculation that does not take into account your specific individual circumstances. The rates & allowances used relate to the 2013/14 tax year
Top 10 Ways to Reduce Your Inheritance Tax Bill
1 – Get Married!
Getting married is a fantastic way to reduce inheritance tax liability on your estate. Whether it is a formal wedding or a civil partnership, the same rules apply as long as you are both domiciled in the UK.
Once you are married, any transfer of assets between married partners, in the event of a death, is completely free of inheritance tax no matter what the value. This means you can leave the full value of all your assets to your partner without the tax man receiving a penny.
Furthermore, the remaining spouse is also able to combine any balance of tax allowance that was not used on your own estate with their own allowance upon their death. Thereby decreasing the overall liability for offspring, dependents and loved ones when they, themselves, pass away which is why marriage can play an important part in your tax planning strategy.
If a husband dies when he and his wife have combined assets of £1.3 million then his estate value will be considered to be £650,000.
If £487,500 is passed to his wife, a process which is exempt from inheritance tax, and the remaining £162,500 is then passed to his children and friends, then he will effectively only have used half of his overall £325,000 nil-rate threshold.
Therefore, when his wife dies, she can combine her own nil-rate threshold allowance with the other half of her husband’s allowance to make up her full entitlement, significantly reducing the level of inheritance tax required to pay for those that she then leaves behind.
2 – Give To Charity
Current UK tax legislation states that anyone who bequeaths money to charity will effectively reduce the inheritance tax liability on their overall estate from 40% down to 36%.
A minimum of 10% of the total value of the estate must be bequeathed to ‘qualifying charities’ however, for many, such an action can make justifiable economic sense.
3 – Pass On Your Assets Early
If you intend to bequeath certain assets or monetary value to your loved ones on your death, then giving the gift while you are still alive could save a lot of expense and prove to be shrewd IHT planning.
Though gifts that are bequeathed within 7 years of your death are considered part of your overall estate, and therefore liable to inheritance tax, if you give a gift before this date then no such tax demands are possible and therefore the value of the gift can be handed over to your loved one in full.
Alternatively consider a rolling gift. Currently £3,000 can be given from your estate in any tax year without it incurring any inheritance tax penalties. And as this amount can be rolled over for a single tax year, it would be possible to bequeath £6,000 today and £3,000 every year from now on, yet still not incur any inheritance charges, even if you died before the 7 years were complete.
For details regarding giving your home to someone please visit the following: https://www.gov.uk/inheritance-tax/inheritance-tax-planning-passing-on-property
4 – Write Your Life Insurance Policies Into Trust
Currently, some of the inheritance tax claimed by the Government originates from the value within Life Insurance policies.
However, simply by writing your policy into trust when you take it out, the value of the policy completely avoids becoming part of your estate and therefore never becomes liable for inheritance tax.
If you already have a life insurance policy in place then check with the supplier to ensure that it has been written into trust. At the time of taking out a policy this process is usually completely free and is a simply matter of ticking a box.
However your policy can be converted into trust after it has been taken out, then even if some paperwork and a small administration charge are required, it can still save your estate a significant amount of cost in the long term.
For more information about trusts please visit our Asset Protection Trust page here: http://www.thinkifa.com/tax-trust/asset-protection-trust/
5 – Offer Your Own Deed of Variation
By including a deed of variation in your will it enables the heirs of your estate to make changes to your will within two years after your death.
Such a clause allows dependents to alter the allocation of assets and actually redirect their own entitlement to another party, effectively reducing their personal need to pay inheritance tax.
Furthermore, if the adjustments made ensures a minimum of 10% of the entire estate is paid to charity, then such a process will ensure the liability of the entire estate is reduced by a further 4%.
Such a proposal does require the agreement of all interested parties and can either distribute the assets more evenly or omit those individuals who are not in a position to meet their proportion of the liability. However all adjustments made are seen to be made by the deceased rather than the beneficiaries themselves, which means there is no 7 year gift liability associated to such a change.
For further details about deed variation please visit the HMRC website here: http://www.hmrc.gov.uk/cto/customerguide/page21.htm
6 – Force Someone Else To Tie The Knot
Bizarrely enough, if you bequeath money to any individual on condition that they themselves get married, such a payment becomes free of inheritance tax liability.
Currently limited to £5,000 from a parent, £2,500 from a grandparent or £1,000 from any other individual, this payment only avoids inheritance if it is stipulated that the monies will only be payable when they beneficiary does tie the knot.
This is not a wedding gift for people who have already exchanged vows but is a conditional payment on the fact that someone marries and the payment is only eligible for that purpose.
7 – Invest in Mother Nature
When the assets you are bequeathing are left in the form of certain environmentally friendly investments, such as woodland, farmland or agricultural activities then a certain proportion of the investment could be left to your dependents without an inheritance tax liability.
There are key factors that need to be considered when taking this inheritance tax planning approach such as the type of activity carried out within the investment and what happens to the produce that is created.
But for those looking to decrease inheritance tax liability for their dependents, such an investment may not only be profitable in life, but it can also significantly decrease the financial cost on your dependents when you pass the assets to them.
8 – Manage Your Pension Correctly
Though lump sums paid from pensions upon the policyholder’s death are usually free of inheritance tax on the death of the first spouse, the same cannot be said when the second death occurs, unless certain steps are taken.
When the proceeds of a pension fund are paid directly to the remaining spouse at the time of the first holder’s death, that money immediately becomes part of the remaining partner’s estate. And upon their death, this money would make up part of the standard estate which is liable for inheritance tax.
However, simply by adjusting the way this lump sum is paid to your spouse after your death, it is possible for them to still have access to the funds in question but any remaining monies on their death will be protected from inheritance tax.
Such a process could be to adjust the payment options within the policy itself or it could mean writing the pension proceeds into trust. There are many different options, and exploring the best one for you could considerably reduce the cost of inheriting for the beneficiaries of the future.
9 – Spend It
A sure fire way to completely avoid the penalties related to inheritance tax, is to make sure you don’t have enough money to leave.
Spending while you are alive will not only ensure you have a better quality of life, but by ensuring the value of the assets you leave behind does not exceed the nil-rate threshold, there is no possibility that the tax man will be able to get their hands on it.
This is of primary importance to cash poor families who may have property or residences that they will to leave to their dependents which, on its own, would normally fall under the nil-rate threshold.
Unless beneficiaries themselves are cash rich, the only way they will be able to afford the inheritance liability is by selling the property. But with careful planning and by simply making sure the value of the estate remains below the threshold by having no cash to give them, it is possible that the family home can remain in the hands of those that are rightfully entitled to it.
Equally, the value of any debts incurred during your life are also deducted from the value of the estate before inheritance tax is calculated. So why not take out a mortgage or liquidate some of your assets and enjoy the money with your loved ones while you are alive instead of leaving it to them when you have gone.
Obviously, anyone who is considering this option must ensure they make provisions to protect themselves against the costs they will incur during the remainder of their lives and protect themselves against potential unforeseen expense such as care home charges or rises in the cost of living. However by maintaining an asset value below the value of the nil-rate threshold it is possible to eliminate the liability of inheritance tax altogether.
10 – Insure Against It
If you are concerned that the inheritance tax liability on your estate is going to be too much for your beneficiaries to handle, then it is possible to take out a specific insurance policy which will cover the cost of any inheritance liability on your estate. This will ensure that all inheritance tax is fully paid and the heirs to your estate will effectively receive the full value of their inheritance.
Depending on your age and medical condition, sometimes the premiums on such a policy can be significant. However in many cases the beneficiaries themselves are happy to contribute to the cost of the premiums knowing that this will offset the more significant charges which may arise at a later date.
It is essential that such a policy is written into trust for this very purpose so that, as soon as probate is granted, the tax liability can be paid. The full funds of the estate can then be released to their intended beneficiary.
The Way Forward
One of the best ways to see how you can reduce your inheritance tax liability is to get advice from an independent financial advisor. They will be able to carry out a thorough investigation of your current status and be able to identify a number of options that will reduce the overall tax liability of your estate.
For many, inheritance tax planning advice could save thousands of pounds in tax costs and considerably increase the value of the estate you leave behind. So contact us today and make the best preparations you can to secure everyone’s future.
Top 5 ways to cut your inheritance tax by the money advice service: https://www.moneyadviceservice.org.uk/en/articles/top-five-ways-to-cut-your-inheritance-tax
Probate explained on the Law Society website: http://www.lawsociety.org.uk/for-the-public/common-legal-issues/probate/