Mitigating Inheritance Tax?

Benjamin Franklin said that ‘nothing can be said to certain except death and taxes.’ Considering that Inheritance Tax is effectively a levy for dying, it seems he was right. Any money or assets left as inheritance will already have been taxed during the benefactor’s life. Sadly though, they can become taxable again in the event of their death. This is, of course, unless you have taken precautions for mitigating inheritance tax during your lifetime.

It’s not all bad news…

First things first, Inheritance Tax only kicks in once the thresholds are exceeded. So, if the value of your estate is beneath these amounts, no Inheritance tax will be due. Mitigating inheritance tax, in this issue, becomes a none-issue.

However, your estate’s value will still need to be reported to HMRC in the event of your death. As such, it’s still best to seek professional advice to check your calculations. This is especially true the closer to the threshold your estimate is!

How do I go about mitigating inheritance tax?

Mitigating inheritance tax is possible but it takes careful planning and forward thinking. Some of the most common methods include:

  • leaving everything above the £325,000 threshold to your partner
  • making regular ‘gifts’ to family and friends
  • putting you assets into trusts
  • leaving money to charitable causes

Let’s take a look at each in turn!

Making a gift to your partner…

Inheritance Tax can be significantly reduced (and sometimes avoided altogether) simply by gifting assets, setting up a trust, investing in certain things or by changing your will.

If you’re married or in a civil partnership, you can (generally-speaking!) give anything you own to your better half during your lifetime. This means your estate won’t have to pay Inheritance Tax on the value of the ‘gift.’

As with all things there are exceptions to the rule. If your spouse was born outside of the UK, the amount you’re allowed to give away may well be limited. Different rules also apply if your partner’s permanent address is outside the UK. So you should always seek advice to determine whether this option for mitigating inheritance tax is best for you.

Making a gift to your friends and/or relations…

Giving money, assets or property away to friends or relations can also really help with mitigating inheritance tax. There are many allowances you can use, but if its a larger gift there is usually one proviso – you need to live for 7 years after you make the gift.

This sounds ‘tongue-in-cheek,’ doesn’t it? However, if you gift something to a family member or friend (so that you no longer benefit from it!), the value of that gift is only included as part of your ‘estate’ for the next 7 years. Once that time has passed, the gift is no longer subject to Inheritance Tax.

You can give away limited amounts each year and not have to pay Inheritance Tax. While these amounts may seem small, over time there are huge savings to be had when you take their cumulative effect into account.

If you think this option may be for you, you will need to carefully consider any Capital Gains Tax implications. Again, speaking to an adviser to see whether this really is the best option for you is always a good idea!

Putting assets into a trust…

Putting assets into a trust can also be a good way of mitigating inheritance tax. Once in a trust, your assets are no longer subject to inclusion as part of your ‘estate’ for Inheritance Tax purposes (again usually after 7 years). The caveat is, of course, that you can not benefit from it.

By way of example, you might set up a trust fund for your adult children, to pay to for your grandchildren’s school-fees.

Trusts can be set up during your lifetime. Many people prefer to establish them in their wills instead though. This is largely the result of the Capital Gains Tax implications that arise if you transfer certain assets into a trust during your lifetime.

While trusts have many benefits, you should be aware that some are subject to their own tax regimes. So do get some professional advice to ensure there are no nasty surprises along the way!

Leaving money to charitable causes…

People actually do leave large amounts of money to their pet. So it comes as no surprise that leaving money to charity is also a popular option for mitigating inheritance tax.

Anything left to charity is free from Inheritance Tax, making it a useful way of reducing your tax bill, while benefiting a cause close to your heart.

Furthermore, leaving at least 10% of your estate to charity will see your Inheritance Tax bill reduced on whatever is left over.

What can you do right now to mitigate your Inheritance Tax bill?

If you’re asking this question, congratulations! You stand a good chance of actually reducing down your bill by thinking about it before it’s too late! Sadly, many people don’t realise that if they simply act during their lifetime, there are a number of ways to minimise inheritance tax. So, to answer the question, plan today!

There really is no time like the present for getting some Inheritance Tax Planning in place. It needn’t be daunting either! Just find a reputable adviser and let them do the hard work for you.

How can an adviser help?

It’s your adviser’s job to establish your financial situation and to clearly define your goals. They should then plan out the best situations for handling your finances and then reduce down your inheritance tax bill.

As experts in their field, your adviser should be able to clarify the jargon and navigate the minefield of financial rules and regulations on your behalf. They should be there to explain away the complexities and to make sure that your affairs are in order for when the time comes.

While we all prefer not to think about a world without us in it, planning for such events can give you and your family great peace of mind. It can also help to ensure that as much of your wealth as possible, stays with the ones you care about most.

If you would feel that a discussion around inheritance tax planning would be helpful, please do call us on 01243 767 469, or email us via our Contact page. We’d be happy to hear from you and glad to help!