The 10 best ways to avoid inheritance tax
10 ways to avoid inheritance
When you die you may want your estate to pass on to your children but having to pay inheritance tax (IHT) may reduce the amount of your estate that ends up in their pockets. This inheritance tax calculator will quickly work out what your potential inheritance tax bill could be.
In this article I look at 10 ways you could prevent the taxman getting his hands on your assets before your children do and start inheritance tax planning.
Firstly I suggest that you download this excellent guide to saving inheritance tax including tips to cut your IHT bill. It is the best guide I’ve found on the subject. Once you’ve downloaded it go to page 8 where you will see a complete list of the exemptions you can claim to reduce your IHT bill.
The guide will also tell you
- how you can now pass on your home to your family free of inheritance tax (page 4)
- the simple ways trusts can be used to eliminate inheritance tax (page 12)
How to avoid inheritance tax
1. Make a will
Making a will is a major part of estate planning as you can make sure that assets are distributed in line with your wishes. Without a will your assets will be distributed according to intestacy rules and may be liable to inheritance tax (IHT) that could otherwise be avoided.
2. Make sure you keep below the inheritance tax threshold
In the tax year 2017/18 the inheritance tax nil rate band, also known as the inheritance tax threshold, for individuals is £325,000. This nil rate IHT band is transferable to a spouse or civil partner on death resulting in a total nil rate band of £650,000 for couples. In the 2015 Summer Budget a new ‘main residence transferable allowance’ was announced which gradually increases from £100,000 in 2017 to £175,000 per person by 2020/21 which may allow people to avoid inheritance tax on property. This sum is in addition to the nil rate IHT threshold. More information on the new inheritance tax allowance on property can be found here.
3. Give your assets away
If you give assets away and you survive for at least 7 years then all gifts are free and avoid inheritance tax. If you die within 7 years then inheritance tax will be paid on a reducing scale. You can also give gifts totalling £3,000 each year completely free of IHT. You can also gift £5,000 on the occasion of a child’s wedding.
4. Put assets into a trust
If you place assets within a trust they will not form part of your estate on death and avoid inheritance tax. You could place assets into a trust for the benefit of your children when the reach the age of 18 for example. This is outlined in more detail on page 12 of the above guide.
5. Put assets into a trust and still get the income
If you place assets into an ‘interest in possession trust’ you can still take income from the assets (which is liable to income tax) whilst avoiding inheritance tax on death.
6. Take out life insurance
You can cover any potential liability for IHT by taking out a life insurance policy for the potential inheritance tax bill and placing the policy in a trust to ensure it is paid outside of your estate.
7. Make gifts out of excess income
You can make ‘gifts out of income’ free from IHT. For gifts to qualify they must form part of normal expenditure, be made out of income and not reduce your standard of living. Some examples are highlighted on page 9 in the above guide.
8. Give away assets that are free from Capital Gains Tax
If you have assets that have fallen in value since purchase (property, shares etc.) they could be passed on without attracting Capital Gains Tax (CGT). Any recovery in the value of any assets would accrue in the estate of the recipient and any gain would be free from a potential IHT liability after 7 years.
9. Leave something to charity
Anything left to a charity will be free of any IHT liability. If you leave at least 10% of your total assets to charity then the inheritance tax rate on the remaining assets will be reduced form 40% to 36%.
10. Spend it!
There is little point in living on a tight budget as you grow older and then your beneficiaries get taxed at 40% on some of your assets. If you have worked hard to build up your assets then you should enjoy them to their upmost, maybe a new car or a holiday of a lifetime will add a bit of a spring to your step in retirement.