7 tips to make you inheritance tax-smart
We’re set to pay more than half a billion pounds of inheritance tax completely unnecessarily, according to research by professional advice firm unbiased.co.uk*. With a few smart moves, you can make sure this money goes to your loved ones instead.
You will have to pay Inheritance tax (IHT) on everything in your estate above the tax free allowance (the amount up to which there is no IHT to pay). For an individual, this is currently £325,000.
As your estate includes assets such as property, money, investments, insurances and valuables, as well as any jointly owned assets, it’s fairly easy to break through the tax free allowance.
It can also be expensive. IHT is charged at the rate of 40%, so you can quickly rack up a hefty bill. For example, an estate worth £500,000 would generate a 40% IHT bill of £70,000.
Most of us would prefer that money to go to our family rather than the taxman and, ultimately, the Treasury. Thankfully, with a little planning on your side, this bill can be avoided, or at least reduced considerably. For a start, that half a billion pounds we mentioned could be eliminated.
Ringfence your life insurance
This is where unbiased.co.uk’s (2016) eyewatering statistic comes from – £595 billion will be wasted because individuals have not put their life insurance policy ‘in trust’. This effectively means that you are putting your policy in a trust to benefit a specified person or people (the beneficiaries) and it is not included as part of your estate. For that reason, it will not be included when IHT is calculated.
This is actually quite easy to do – you simply ask your life insurance provider for the paperwork to put your policy in trust. This is also known as a policy ‘written in trust’. It’s as simple as that.
6 more ways to legitimately reduce your estate and reduce your IHT bill
1. Leave it to your (official) spouse
Anything you leave to a husband, wife or civil partner who has their permanent home in the UK is exempt from IHT. In addition, married couples and civil partners can transfer their tax free inheritance tax allowance, so the surviving spouse’s nil rate band is increased by any their partner didn’t use. Effectively, this could double the amount that remains free from IHT.
2. The £3,000 rule
You can give away gifts, including money, worth up to a total of £3,000 in every tax year. It takes seven years for larger gifts to become exempt. You can also carry forward the previous year’s £3,000 allowance if it wasn’t used.
3. …And the £250 rule
On top of the £3,000 annual exemption, you can also give away as many gifts worth up to £250 to as many people as you like, although this allowance cannot be used with other exemptions when giving to the same person.
4. A generous wedding gift
Weddings and civil partnerships are one way to instantly reduce the size of your estate. A parent can give cash or gifts worth up to £5,000, a grandparent up to £2,500 and anyone else up to £1,000.
5. Regular payments are allowed
If you give away a regular gift out of your income, and this doesn’t affect your lifestyle, this can be immediately outside your estate too. This exemption is often overlooked but could potentially allow you to give away a decent chunk of your income to your family through a regular allowance.
6. Decide which cause gets your money
Rather than putting your hard-earned savings into the national melting pot, you could choose to donate them to a favourite cause – this can be done while you are living or in your will.
Anything you give to charities, national institutions such as museums, universities and the National Trust or to a UK political party with at least two MPs is instantly outside your estate – it’s an exempt gift.
Make it as easy as possible for those left behind
If you document everything you do, especially when you’re making gifts, this will make it easy for your executors to claim any exemptions.
It’s also important to have a valid will in place. This could reduce the amount of IHT you pay if your spouse is a beneficiary or if you leave an exempt gift as specified above – but even if it doesn’t, it will ensure your estate is divided in line with your wishes.
Without a will, your estate will be divided in line with the rules of intestacy and could mean that your children may inherit part of your estate before your spouse or civil partner dies – which may not be your preference. By making a will, you can ensure that everything goes to who you want.
Please note: This blog is based on our understanding of inheritance tax and is intended to provide basic information, not financial advice, to help you make an informed decision when planning for the future.
The content of this article is for information purposes only and does not constitute financial advice. We do not offer financial advice. If you’re unsure as to the suitability of a product you should seek advice from a Financial Adviser. You may have to pay for this advice.