The best way to reduce your Inheritance Tax (IHT) bill for your loved ones is to start planning now. The sooner you put things in place the easier it will be to put the right things in place for your family when you are gone.
Here are some ways to reduce your IHT bill.
1. Write a will
The first thing to do is to make a will. If you don’t state how you want your assets to be divided, the law decides for you. That means that even more than necessary could end up going to the taxman. You might also want to appoint a lawyer to help you draft your will, especially if your financial or family situation is complex. If you leave at least 10% of your estate to charity, your family will pay a reduced rate of inheritance tax.
2. Spend your money
The simplest way to reduce or avoid inheritance tax altogether is to try to get your taxable estate under the threshold. This means you could spend money on yourself while you’re still alive, so why not go on that holiday of a lifetime? Or you could gift some cash or assets to family and friends, though there are rules around this.
3. Gifts and inheritance tax
We can all give away up to £3,000 each tax year without it being added to the value of your estate. You can choose to give the full £3000 to one person or split it between a number of people. You can also roll the £3,000 annual allowance over, so if you didn’t use it last year, you can give away cash or assets worth £6,000 this tax year. But it only lasts for one year. There are other gifts you can give too, such as £5,000 towards a child’s marriage or £2,500 for a grandchild’s. You can give away more than that but be aware that gifts could be subject to the seven-year tax rule, which we explain below. Beware: the taxman has always got an eye on who might be giving away their money just before they die.
4. Remember the seven-year rule
If you go over the inheritance tax-free threshold, gifts will only be completely free from IHT if you live for seven years afterwards. If you die in less than seven years and have given away more than your tax-free allowance, the gift will be taxed on a sliding scale.
5. Grow your pension pot
Pension savings can be passed on to family when you die without being subject to inheritance tax. This is because pensions don’t usually form part of your taxable estate. But bear in mind that if you die before the age of 75 one or more people can inherit the pot as a tax-free lump sum up to the lifetime allowance of £1,073,100. If you die after 75 those inheriting the pension pot have to pay their highest rate of income tax on any withdrawals. So if possible keep your pensions intact, and focus on spending or gifting money from ISAs or other savings.
6. Draw up a trust
You may want to consider putting some of your assets into a trust for a loved one. A trust is a legal agreement. You decide who manages the money (the trustees) and who the money is used for (the beneficiaries). There are lots of different types of trust and some will allow you to ringfence the money or property so that it sits outside of your estate when you die. Trusts are a complicated area and can be expensive to set up. Some are subject to other tax regimes, so you should get authorised and regulated, specialist advice.
7. Unusual methods
There are other more unusual methods to reduce your IHT bill, including:
• Giving cash to political parties
• Investing in shares on the Alternative Investment Market (AIM)
• Buying agricultural land
Financial Advice Including Pension Advice, Bristol
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