An inheritance tax is a tax on the estate of someone who has passed away, including their property, money, and any other possessions of notable value. In the UK, the standard inheritance tax rate is 40% on the value of the estate above the tax-free threshold, which is currently £325,000.
However, with careful planning, it is possible to reduce the inheritance tax burden on your beneficiaries.
Understanding Inheritance Tax
The first thing to understand is that inheritance tax is calculated on the value of your estate at the time of your death. If your estate is worth more than the £325,000 threshold, known as the nil-rate band, the excess is taxed at 40%. However, there are ways to reduce the taxable value of your estate, ensuring that more of your wealth is passed on to your heirs.
One important consideration is the transferable nil-rate band. If you’re married or in a civil partnership, any unused part of your tax-free threshold can be transferred to your partner. This means that couples can potentially leave up to £650,000 tax-free. Additionally, the residence nil-rate band allows you to pass on a family home with an extra tax-free allowance, currently up to £175,000.
Now let’s look at some strategies for minimising your inheritance tax burden.
Gifts and Exemptions
Gifting assets during your lifetime is a wise strategy for reducing inheritance tax. Firstly, you can give away up to £3,000 each year without it being added to the value of your estate, and this allowance can be carried over to the next year if unused. Secondly, small gifts up to £250 per person, wedding gifts, and gifts to charities are exempt from inheritance tax.
It is also possible to make larger gifts, but these may be subject to inheritance tax if you pass away within seven years of making them. This is known as the seven-year rule. If you survive for more than seven years after making the gift, it is completely exempt from inheritance tax.
Trusts
Setting up a trust can be an effective way to manage how your wealth is distributed and reduce your estate’s value for inheritance tax purposes. Trusts allow you to transfer assets out of your estate while still retaining some control over how they are used. However, the rules around trusts can be complex, so it is important to seek professional advice to ensure this strategy is right for you.
Life Insurance
Finally, taking out a life insurance policy that covers the inheritance tax liability can be another useful strategy to ensure your beneficiaries aren’t left with a hefty tax bill. To be effective, the policy should be written in trust, so the payout doesn’t increase the value of your estate and is directly available to cover the tax.
It’s clear that effective inheritance tax planning is essential to ensure that your loved ones inherit as much of your estate as possible. Given the complexities involved, consulting with a financial advisor is highly recommended to tailor an inheritance tax strategy to your individual circumstances.
If you want to develop a beneficial inheritance tax strategy, then book a FREE no-obligation meeting with one of our experts here at Integritas today.
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