When most people pass on they wish to leave their estate to beneficiaries, but in an ideal world they want to ensure that those beneficiaries have to pay as little inheritance tax as possible. There are plenty of steps that you can take to ensure that this is the case.
1. Make a will
Undoubtedly the most important part of inheritance tax planning is making a will. This not only ensures that everything is taken care of in a tax-efficient manner but also means that your wishes will be carried out. You might imagine that what you want to do with your estate when you pass on would be obvious, but it can result in an administrator overseeing how your estate is distributed. A will at the very least means that tax efficiency will not be a concern.
Making a will is quick and easy — there really is no excuse not to have one. Make this a priority to sort out so that you can have the peace of mind to know the document is in place.
2. Understand your situation
It is vital that you should understand how inheritance tax is going to affect you. For example, many people are not aware of the thresholds involved and so they make plans and takes steps that aren’t really necessary. Firstly, it should be noted that each individual has a tax-free allowance of £325,000. So if your estate is valued at less than this figure, there will be no inheritance tax to pay for anyone involved.
It should also be noted that if you are planning to transfer your estate to your spouse, there is no inheritance tax on this, regardless of the amount. This also means that if the death of the first spouse does not use up the tax-free allowance, the death of the second spouse will gain that allowance — so no inheritance tax would have to be paid up to £650,000.
3. Get advice from a specialist
The above shows that inheritance tax has the potential to get very complicated very quickly. The situation for almost everyone is different, so it’s important that you take advice from inheritance tax specialists. Speak to a trusted firm of chartered accountants and they will be able to offer you guidance and insight into the best course of action for you.
4. Give away your assets
It should first be noted that you can give away gifts totalling up to £3,000 each year which is entirely exempt from inheritance tax (you can also give away £5,000 as a gift if your child gets married). If however you give away anything above the £3,000 threshold it will be subject to inheritance tax should you die within seven years of the gift. However, if you survive for at least seven years after the gift is given then it will be completely free from inheritance tax.
5. Use a trust
Putting a part of your estate into a trust can be an extremely valuable way to reduce inheritance tax. Once an asset is in a trust it is considered to be no longer a part of your estate and as such it is not subject to tax. Trusts are usually used to form a part of a future investment — for example, you might set up a trust to fund your children’s education. When you have assets or cash in a trust, this means that you will effectively no longer have access to them so this will not necessarily be a good option for everyone.
6. Leave money to a charity
Firstly, anything that you leave a charity will be entirely tax-free so you don’t need to be concerned about this element of inheritance tax. But charitable donations can also benefit you. When you leave at least 10 per cent of your estate to charity, the rest of your estate will be taxed at 34 per cent, instead of the standard 40 per cent.
7. Take out life insurance
Finally, it can be a very good idea to take out life insurance. The sum that is paid out on your death can be used to cover the remaining inheritance tax bill and give you peace of mind.