6 Proven Strategies for Reducing Your Inheritance Tax Liabilities
Inheritance tax (IHT) is a tax on the assets that are passed down to your heirs after you pass away. Whilst it may not be the most pleasant topic to think about, it's important to understand how inheritance tax works and how to potentially minimise this tax burden.
As IHT is a complicated subject, it's recommended that you should seek professional advice before undertaking any IHT planning.
Here are six things to think about when considering your IHT exposure and looking to reduce it:
1. Know the numbers
The first step is to establish your estate value – this will be the total of all the assets you own (solely or jointly) – for joint assets, take the share of the asset you own into account. Once you have your personal balance sheet established, consider the exemptions and reliefs to ascertain if you have a potential liability. Your chargeable estate will be taxed at 40%.
2. Exemptions and reliefs
There are various exemptions and reliefs to consider which reduce your chargeable estate for IHT purposes, the main ones being:
- Nil Rate Band – currently £325,000
- Main Residence Nil Rate Band – currently £175,000. However, it's important to bear in mind that there are a number of qualifying rules for this to apply predominately being:
- The main residence needs to be left to a direct descendent
- The total estate value needs to be below £2m for full relief to apply
- Regarding downsizing etc, there are complicated rules around this, so seek professional advice on this matter
- Charitable gifts – any gifts left to charity in your will are exempt from IHT; if you leave at least 10% of your estate to charity, the IHT rate on the rest of the estate reduces from 40% to 36%
- Spousal exemption – any assets left to your surviving spouse are exempt from IHT provided your spouse is UK domiciled
3. Make a will
The first thing to do in any IHT planning is to make sure you have a valid up-to-date will in place. Without a will, the rules of intestacy apply, and this may not put the assets where you want them to be. It can also lead to an IHT liability on the 1st death within a husband & wife (or civil partnership) situation.
4. Consider life assurance
If you don’t want to be giving away assets, one way to cover the IHT liability is to take out a life policy to cover the potential tax that may be due. You need to ensure the policy is written in trust (otherwise it could form part of your estate!). Again, independent professional advice should be sought to ensure the policies are set up correctly.
5. Make gifts
If you give away assets and survive 7 years from the date of the gift, the value of the gift falls outside of your estate. Care is needed around certain gifts with reservation of benefit rules and the gifts should be properly documented.
6. Make use of trusts:
Trusts can be a useful tool for reducing your inheritance tax liabilities. By transferring ownership of your assets to a trust, you can protect them from being included in your estate for tax purposes. Trusts can also be used to manage assets on behalf of your heirs, ensuring that they are used for their intended purpose. They also provide a level of asset protection for your beneficiaries against any potential 3rd party claims. Trusts are a complicated subject, so (again) professional advice should be sought.
If you would like any further information, please email me at paul.dell@raffingers.co.uk or click here.