It happens to us all eventually – death. But what happens to your estate when you die?
With Inheritance Tax being charged at 40% you will want your family to keep more of your estate and give less to the taxman.
There are some simple ways to reduce the taxman’s take. Whilst it is true that more estates are paying Inheritance Tax (IHT) these days, why should you pay HMRC more than necessary.
Here are some IHT reducing strategies to think about:
1. Give it to your family!
A simple way to reduce a future IHT bill is to give some of your wealth away during your lifetime. You can give away up to £3,000 per person per tax year and not have to pay IHT on it. You can also make use of an unused £3,000 allowance from the previous tax year. So, a couple could potentially remove £12,000 from their joint estate each year. Remember, the previous year’s allowance is lost if you do not use it.
2. Make gifts out of income
Those fortunate to have surplus income each year may want to take account of the ‘normal expenditure out of income’ rule – if you make regular gifts out of income and in doing so don’t affect your standard of living, they are exempt from IHT.
This exemption is only limited by your personal resources and the amount of spare income available to give away.
You should keep a record of who you made the gifts to, their value and the date they were made.
You could also consider establishing a standing order (for instance to provide funds to pay for grandchildren’s school fees) as it supports the intent to make the gifts on a regular basis. If you can satisfy the conditions for the exemption, the gifts escape IHT as soon as they are made.
3. Place assets into trust
Assets that are placed into trust will be outside of your estate, provided you survive for seven years. So, the use of trusts can potentially reduce an IHT bill. You can set up a trust now or write one into your Will. The rules are complicated, and there are anti-avoidance rules that must be navigated, so you should take advice from an expert.
4. Save more into your own pension
Saving into your own pension will avoid IHT at 40% which could be incurred were the same funds held elsewhere in your estate. This is because anything left in your pension can be paid as a lump sum or income to any beneficiary with absolutely no tax to pay if you die before the age of 75. If you are 75 or over when you die – and that is likely to be the case for most individuals – your heirs do pay Income Tax, but only when they take the money out.
5. Review your Will
Who you leave money to in your Will might affect whether or not IHT is payable. For example, money or property left to a spouse or registered civil partner does not attract IHT. But if your estate passes to a child, then IHT at 40% will normally have to be paid on anything over the £325,000 nil-rate band.
This usually means that couples often leave everything to each other but you could make a provision to ensure that your nil-rate band legacy is left to your children, via a trust for example, with the rest of your estate going to your spouse or civil partner. This could ensure assets are passed to children and other loved ones without attracting IHT.
The IHT rules are complex so contact us today to arrange a FREE consultation, we have Certified Accountants and Tax Advisers in Canary Wharf, Essex and Manchester waiting for your call.
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