In this blog, we will explore various strategies on how to avoid inheritance tax, including ways to navigate property inheritance, considerations after the second parent's passing, and the use of trusts.
Understanding Inheritance Tax
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Gifts and Annual Exemption
One of the most straightforward methods of mitigating inheritance tax is through gifting. The law allows you to give away a certain amount of money, known as the ‘annual gift allowance,’ without incurring inheritance tax.
Currently, you can gift up to £3,000 per year, tax-free. You can also carry forward the unused portion of this allowance to the next year, which can be carried forward for one year, thus maximizing the potential gift amount to £6,000 in a single year if unused.
Furthermore, regular gifts made out of surplus income can be IHT-exempt, provided they meet certain criteria and do not affect your living standards.
How to Avoid Inheritance Tax on Property
Property often represents a substantial proportion of one’s estate. To avoid IHT liabilities on property, consider the following strategies:
Principal Private Residence Relief
If you live in the property, your home is generally exempt from inheritance tax when you pass away. If you subsequently rent it out, you might still qualify for some relief based on how long you have lived there.
Gifts of Property During Your Lifetime
Transferring ownership of a property, such as buy-to-let, can transfer potential capital from your estate. However, this is subject to the ‘seven-year rule,’ which means that if you survive the gift by seven years, it falls outside your estate for IHT calculations.
Joint Ownership
Owning property as ‘joint tenants’ allows you to pass your share of property directly to the survivor. This might help mitigate IHT but has to be assessed against changing assets and relationships.
How to Use Trusts to Avoid Inheritance Tax
Setting up a trust can be an effective way to protect your assets from inheritance tax, ensuring they are passed down to heirs in a controlled manner.
Discretionary Trusts
When you set up a discretionary trust, the assets you place within it are outside your estate for tax purposes after seven years. This trust gives the trustees flexibility to distribute income or capital at their discretion.
Life Insurance Trusts
By placing a life insurance policy within a trust, the payout can be excluded from your estate, thus avoiding IHT. This can ensure that your beneficiaries receive the full value of your life insurance policy without tax implications.
Charitable Trusts
If you leave a portion of your estate to charity, the value can be deducted from your taxable estate, thus lowering the IHT bill. Additionally, if you leave more than 10% of your estate to charity, you can benefit from a reduced IHT rate on the balance.
How to Avoid Inheritance Tax When the Second Parent Dies
Dealing with inheritance tax after the death of both parents can complicate matters. However, there are strategies that can alleviate the financial burden:
Spousal Exemption
When one spouse passes away, the surviving spouse can inherit their estate without IHT liability. It’s crucial to ensure that the first deceased spouse’s nil-rate band is transferred to the surviving spouse, adding to their tax-free threshold.
Claiming the Residence Nil-rate Band (RNRB)
Families may qualify for an additional allowance of up to £175,000 if they pass on a main residence to direct descendants. This can significantly increase the amount that can be inherited tax-free, effectively enabling couples to have an allowance of up to £1 million between them, depending on the value of their home.
Reach out to an inheritance tax specialist to take advantage of all the opportunities to secure and preserve your legacy today!
Leverage IHT-Efficient Investments
Investing in certain tax-efficient vehicles can also be beneficial in navigating inheritance tax: • Business Property Relief (BPR)
If you own a business or shares in a business, you may be eligible for relief from inheritance tax if the business is passed on to successors. BPR can allow up to 100% exemption from inheritance tax.
Agricultural Property Relief (APR)
Similar to BPR but specific to agricultural property, it can provide substantial inheritance tax relief for farmland or agricultural businesses, which can often be tied up in leases and ownership.
Contribute to a Pension Pot
Pensions are an effective vehicle to mitigate inheritance tax. Typically, pensions are not considered part of your estate for inheritance tax purposes. Moreover, if you pass away before the age of 75, your beneficiaries can receive the funds from your pension tax-free. This makes it an attractive option for those keen on passing wealth to the next generation.
Prioritise Estate Planning
Comprehensive estate planning is pivotal to avoiding inheritance. Working with professionals can help structure your estate thoughtfully to minimise your potential tax exposure:
Life Insurance Policies
By taking out life insurance policies that are written in trust, your family can receive funds outside of your estate, thereby preserving wealth.
Regularly Review Your Will
Ensure your will reflects your current financial situation. Inheritances can affect your estate's value and thus your IHT liability, so regularly reviewing your will ensures effective planning.
Get Tax Planning Advice from Legend Financial
Avoiding inheritance tax in the UK requires careful consideration and strategic planning. By leveraging exemptions, gifts, trusts, and thoughtful estate planning, you can minimise your inheritance tax liabilities and ensure that your hard-earned assets are passed on to your loved ones.
For personalised advice on how to avoid inheritance tax, reach out to Legend Financial’s IHT specialists. We will help you create a bespoke plan that meets your specific needs and more.
