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Planning How to Avoid Inheritance Tax

The topic of death duties is a complex one and often ignored until it's too late. But, a few simple Inheritance Tax planning ideas can save a lot of money for your loved ones in the event of your death.

ELIMINATING IHT: These six tips on how to avoid Inheritance Tax could help you reduce taxes and keep the riches in your family.

Note: This wealth and taxation planning guide does not replace getting professional advice from a financial adviser.

Even so, it may be an invaluable resource for anyone who benefited from an inheritance or is planning an estate.

It is a guide with forethought for people who are looking for ways to reduce death duties on their estate after they have passed. The list contains several simple, and completely legal, ways to cut Inheritance Tax.

After all, the taxman will take some of your hard-earned money if the value of your estate is above IHT threshold. But, there is a way to avoid or reduce Inheritance Tax.

In short, you can choose to give away assets, change your will, or set up a trust. No matter what you decide, here are some easy ways to organise your future and eliminate tax consequences.

1. Making a Will

You should never underestimate the importance of making a will. It is a major part of estate planning. After all, it is the only way to ensure the distribution of all your assets fall in line with your plans.

Intestacy law determines who inherits if someone dies without a will in the United Kingdom. In fact, you can also change a will after a death. Form IOV2 helps you work out whether a ‘variation’ to the will would meet the legal requirements.

Note: You can make a will at home or through a solicitor. But, you must make sure your will is valid and change it when your circumstances change.

2. Giving Away Gifts or Assets

Being married, or living in a civil partnership, means you can gift anything that you own to your partner. But, it does not apply if they were born, or live ‘permanently’, outside of the United Kingdom.

Gifts to Family Members and Friends

In some cases, a gift given to a family member or a friend (not spouse) would get included in your estate. So, you may need to pay Inheritance Tax bill on it if you die within seven years of giving it.

But, you can give away limited amounts each tax year without having to pay death duties. For example:

  • You can give away gifts up to £3,000 each tax year and they would be free of Inheritance Tax.
  • You can give away wedding gifts to your child or grandchild up to the value of £5,000 free of IHT.

Note: Some Capital Gains Tax liabilities may apply to assets gifted away during a lifetime. The Inheritance Tax and probate helpline can provide further information.

3. Putting Assets into a Trust

As a rule, assets placed within a trust do not form part of an estate after death. Setting up a trust can help to cover the costs of education or living with a disability. Even though it can help you avoid Inheritance tax, trusts and UK taxes are a complex topic to understand without professional advice.

An ‘interest in possession trust’ is a way of putting assets into a trust and still getting the income. But, like other similar investments, you may be liable for tax on property, money, and shares you inherit. But, it is another way of avoiding Inheritance Tax after your death.

Note: Trusts can be set up straight away or you could also choose to establish a trust in your will to avoid paying Capital Gains Tax.

4. Leaving Money to Charity

Whatever you leave to charity will be free of Inheritance Tax rates. It is a common practice used to benefit one of the deserving causes and used to reduce an Inheritance Tax bill at the same time.

Leaving at least 10% of the estate to charity cuts how much would be due on the remaining amount. Thus, the rate paid on the rest would reduce from 40% to 36%. You can use the Inheritance Tax reduced rate calculator to work out how much you need for qualification.

HMRC would set the rate against the balance of the estate and how the current Inheritance Tax threshold affects it. Even so, you can reduce it or eliminate it by making certain gifts in your lifetime.


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5. Taking Out Life Insurance

In fact, a life insurance policy would not ‘directly’ reduce the amount of tax due on someone’s estate. But, a big payout from the insurance company may ease the finances for a surviving family. In a worse case scenario, it may mean they can avoid selling the family home.

Note: As a rule, it would be best to put the life insurance payout into trust. Not doing so means the estate gets bigger and it will be liable for further taxation.

6. You Could Spend It!

As we get older, many of us live a frugal life on a tighter budget. There are benefits of planning for retirement, in or outside the United Kingdom. But, is it smart and savvy to do so if it means our beneficiaries get taxed at 40% on some of the assets?

Having assets around you in later life usually means you worked hard to accumulate them. Then, should you not enjoy them to their upmost? Why not but a new car or embark on that holiday of a lifetime? Remember, spending your money on yourself and enjoying retirement is not a crime!

Inheritance Tax Planning Ideas for Your Estate in United Kingdom