It’s only natural that most of us would want to reduce the amount of our wealth that passes to HMRC instead of loved ones after we die. Without careful planning, the inheritance tax bill can be significant, even for estates that don’t run into the millions of pounds.
Here are a few tips for methods you can use to protect your estate and pass on as much of it as possible to people or causes you want to help. A word of caution first: always seek professional advice before taking any actions to manage your estate to reduce the tax burden. There are often strict rules governing the details of what you can and can’t do.
1. Spend It
This doesn’t mean being reckless. But is there any point going without holidays and other things in later life only for the money you could have spent to be swallowed in taxes?
There are thresholds that govern when inheritance tax becomes payable and rules for transferring tax-free allowances between spouses. Managing your estate to stay below the threshold could be your overall goal.
There are also opportunities to release capital tied up in your home, which could reduce the size of your estate and make your life more comfortable at the same time.
2. Give Some Away
Assets you give away can still be liable for inheritance tax if you die within seven years; so simply giving all of your wealth away is rarely a wise strategy. However, there are annual amounts you can gift completely free of tax and other exemptions you can use.
If you make gifts out of excess income that do not affect your standard of living these may also be exempt.
3. Place Assets into Trusts
If you have children or grandchildren that you want to benefit from your estate, you have the option of putting assets into a trust. If you do this correctly the assets are no longer part of your estate and will not count towards the inheritance tax threshold.
There are several different types of trust and criteria that you must satisfy for this approach to be effective – make sure you take professional advice.
4. Leave Money to Charity
Bequests to registered charities are deducted from the total value of your estate. If you leave 10% of your estate to charity the inheritance tax rate is reduced from 40% to 36% for the remainder of your estate. If you plan to use this route it makes sense to have your estate valued accurately and for the valuation to be reviewed periodically so you can update your estate planning and wills.
5. Life Insurance
It may be possible to take out a life insurance policy to cover your inheritance tax liability. If you place the policy in a trust it will be outside of the value of your estate. Obviously, if you are older or in poor health the premiums might be prohibitive.
These tips will hopefully give you some ideas and convince you of the value of active estate planning. PowellsLaw has helped many people in the Weston-Super-Mare area take the right steps to protect, release and pass on their wealth in the most efficient way possible. Contact us if you are looking for some advice.