Five Ways of Reducing Your Inheritance Tax

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If you believe that your estate might have to pay inheritance tax, then there are ways in which you can reduce this amount for your family’s benefit.  And don’t worry, not all these ways involve changing your Will.

We understand that making changes to your Will can be as costly as drafting a new one. If you aren’t sure of how much does a will cost, check online or contact your financial advisor for guidance.

But if you are worried about the amount that you have to pay in tax, here are five top ways of reducing it.

1: Make a Gift to Your Partner

To reduce or avoid paying inheritance tax, you have to pass on your estate to your spouse or civil partner as a gift in your Will. But in case your spouse was born outside the UK, the amount you give them might be limited. The rules are different if your spouse or civil partner’s permanent residency is outside the UK. Make sure your seek guidance from your lawyer and financial advisor as these rules are very complex to understand.

2: Give to Family Members or Friends

In case you give something to your family members or friends apart from your spouse or civil partner (in a way that it no longer benefits you), the value of the gift is still included in your estate for inheritance tax (but for seven years only).

For instance, if you give one of your children some money and you live for a further seven years, that amount will not be taken into account while calculating the inheritance tax liability when you die.

This way, you can keep giving limited amounts each year so as to avoid paying inheritance tax. Just remember that there might also be capital gains tax that you have pay on certain assets that you give away in your lifetime. Ensure with your lawyer and accountant in case you are unsure.

3: Get a Trust

If you decide to put your cash, property or investments in a trust, they are no longer considered as a part of your estate while calculating inheritance tax. The downside to this approach is that you, your spouse and children under 18 years cannot benefit from it.

For instance, you can easily set up a trust for your children, for paying your grandchildren’s future education or for supporting a family member with disability.

A trust can be set up immediately or can be established in your legal Will.

There are chances that you may be liable to pay capital gains tax if you are transferring certain assets into a trust over your lifetime. However, if the same is established in your Will then you are not liable to pay capital gains tax.

Remember that some trusts are subjected to their own tax regimes and they might have to pay inheritance tax themselves. Also, your trustees are liable for income tax at a rate of 45 per cent and capital gains tax at 28 per cent. Make sure you are seeking expert guidance when planning to engage with these trusts as their rules are complex to understand.

4: Leave Something to Charity

Everything that goes for charity is free of inheritance tax. So, it can be one of the useful ways of reducing or avoiding inheritance tax bill while benefiting a good cause. If you are leaving 10 percent of your estate to charity, your inheritance tax is calculated at the rate of 36 per cent instead of 40 per cent.

This rate is set against the balance of the estate to an extent that it exceeds the available nil-rate band. Although it may not be a huge saving, it still means that your friends and family will receive more than they would do otherwise.

5: Take Out Some Life Insurance

Although if you have an insurance policy under your name, it still does not reduce the amount of inheritance tax that you have to pay on your estate. However, the insurance payouts will make it easier for your family and friends to continue paying the bills.

This could further mean that they will be able to prevent the family home from being sold. Just remember, if you take this approach, you have to make sure that the life insurance payout goes into a trust. Failing to do so will only make your estate bigger and in turn you have to pay more tax.