Inheritance tax represents an unwelcome obstacle and additional expense incurred at a particularly difficult time of life. As it stands, the current inheritance tax threshold in England and Wales stands at £325,000.
If the total value of the estate falls below this threshold, no inheritance tax is payable. All inheritance that exceeds £325,000 is liable for taxation at a rate of 40%.
Avoiding inheritance tax altogether isn’t always possible, but there are various options to explore that can help minimise inheritance tax obligations for the recipient of your estate. The most effective examples of which being as follows:
1. Leave a final will and testament
First and foremost, it’s important to ensure that you complete a formal will and testament. There are various stipulations with regard to how a final will and testament should be structured and formalised, which can be useful for the minimisation of inheritance tax obligations. If unsure, seek professional representation to ensure your final will and testament is in order.
2. Use your gift allowances
Keeping the total value of your estate within the threshold of £325,000 is the only way of eliminating inheritance tax from the equation. One effective way of doing so is to use your gift allowances strategically. Legislation allows for gifts to be given up to a total value of £3,000 per year tax-free. However, gifts handed out during the seven years leading up to death are added to the value of your final estate.
3. Invest strategically
There are certain investments that can provide a specific amount of inheritance tax relief. All while generating potentially healthy returns as an added bonus. If interested in strategic investment opportunities, seek independent financial advice from an experienced specialist.
4. Write life insurance policies in trust
This essentially means ensuring that your life insurance policies pay out to your appointed trustees without inheritance tax before grant of probate. Writing life insurance policies in trust can enhance flexibility and reduce tax obligations – seek professional advice to ensure this is an appropriate option for your case.
5. Tax relief for farmers and business owners
If you are a farmer or a business owner, there are steps that can be taken to reduce inheritance tax obligations to enable your business to continue following your death. There are specific forms of tax relief available exclusively for farmers and business owners, which should be explored under the watch of an experienced adviser.
6. Gift your excess income
There’s an interesting though often overlooked way of sidestepping the seven-year gift rule, which involves demonstrating that the gifts were given using your excess income. You’ll need detailed and accurate financial records to qualify for this form of tax relief, which could help bring you closer to the minimum taxation threshold.
7. Make use of trusts
Paying into a trust can be a great way of passing a larger estate onto a younger beneficiary, or giving away assets while retaining control. Gifts paid into trusts are exempt from inheritance tax after seven years, allowing the individual to keep control of their assets and determine their intended beneficiaries.
8. Leave charitable gifts
Anything you leave to a charitable organisation is automatically exempt from inheritance taxation. If a minimum of 10% of the total value of your estate is bequeathed to a charitable organisation, the standard 40% inheritance tax rate is reduced to 36%. Depending on the value of your estate, this could significantly reduce inheritance taxation liability for your intended recipient or recipients. There are complex rules governing eligibility of tax relief through charitable contributions, so seeking professional support is vital.
9. Your pension options
There are some pension schemes that offer a variety of benefits that are exempt from inheritance tax. A good reason to carefully consider as many pension options as possible with the help of a specialist broker. Structured strategically, your pension (or pensions) could have a significant impact on the inheritance tax liability of your beneficiaries.
10. Start planning as early as possible
Last but not least, leaving things until the last possible moment could have significant and costly consequences. The earlier you begin planning for your financial future – and that of your beneficiaries – the better. Once again, the importance of seeking independent financial advice cannot be overstated. The more options you consider along the way, the more likely you are to access as many inheritance tax reliefs as possible.