The current inheritance tax threshold is £325,000 per person – anything that your relatives and inheritors receive beyond this figure is taxed at 40 per cent. For people with significant estates this can mean a very large tax bill that may be very difficult to pay, for example, in the case where someone inherits a family home. So it is very important that you take steps to sensible plan your estate to ensure that inheritance tax is as low as possible. I spoke to inheritance tax specialists, Wellden Turnbull to learn more about the subject and understand the best ways to reduce your inheritance tax. Here are seven ideas you can follow.
- Understand the seven year rule
The first thing to note is that many people believe that they can simply avoid inheritance tax simply giving away their assets to family and friends before they die, so that when they pass on there is no inheritance to pay tax on. However, on gifts given before you die, inheritance tax will still be charged at 40 per cent. So your loved ones will still have to pay tax on these items even if they were given away while you are still alive.
However, gifts made between three and seven years before you die will be taxed on a sliding scale. And if you give gifts away and then survive for more than seven years, inheritance tax will no longer be taken on these gifts. That is why is so important to begin planning for inheritance tax as early as possible.
- Gift up to £3,000 per year
It should be pointed out that you can give up to £3,000 per year in what is known as your annual exemption. This £3,000 worth of gifts will not be subject to normal inheritance tax rules. This is a good way to begin reducing the value of your estate. And additionally you can give a small gift exemption of up to £250 to as many people as you like (aside from person who you gave your annual exemption gift).
- Wedding gift
If someone close to you is getting married it is also possible for you to gift them without it being subject to inheritance tax. The amount that you can gift depends on your relationship to person getting married. If it is your child you can gift up to £5,000, if it is your grandchild you can gift up to £2,500, and for anyone else you can gift up to £1,000. And it should be noted that these gifts cannot be given retrospectively – they must be given on or before the day of the wedding.
- Contribute to future pensions
If you have children or grandchildren it is also possible that you can use your estate to start a pension pot for them. For each child you can contribute up to £3,600 per year – and due to tax relief this will only actually cost £2,880, so it is very worthwhile.
- Donate to charity
When many people die they like to contribute a significant portion of their estate to charity. And aside from helping a good cause, this can also help reduce the eventual inheritance tax bill. Firstly, any gifts you give to charity will be entirely exempt for inheritance tax. But it is also true that if you donate more than 10 per cent of your estate to charity, the rate of inheritance tax on the rest of your estate is applied at 36 per cent rather than the standard 40 per cent.
- Invest in life cover
If you have used all of these methods and your relatives are still looking a very significant inheritance tax bill, it could worth looking into the possibility of whole-of-life insurance. These policies are designed to pay out when you die in order to cover some or all of the cost of the inheritance tax.
- Write a will (and keep it up-to-date)
Finally, but perhaps most important, it is vital that you should have a will written and kept up-to-date. It might seem obvious to you where you wish for your inheritance to go, but if there is no written record to state who should be a beneficiary from your estate, a solicitor may be brought in to attempt to divide assets fairly. And of course there is no incentive for them to consider tax efficiency when they do so.