10 Ways To Protect Your Assets And Reduce Inheritance Tax

When the time comes and your loved ones come to inherit your estate, the last thing you will want to leave them is a massive Inheritance Tax bill. Even if you consider your wealth levels to be modest, there are still some things you must consider to minimise Inheritance Tax, especially if you own property, and have a portfolio of savings and investments.

What is Inheritance Tax?

Inheritance Tax (IHT) in the UK is a tax payable in the UK upon death. The total value of your estate is taken into consideration and sometimes certain gifts made during your lifetime are too. Presently, there is no IHT charged on estates worth up to £325,000 (this is the nil-rate band) for the 2020/21 tax year).

If your estate is worth more than £325,000, then IHT will be charged on the portion of the estate over that limit. The current rate of IHT is 40% which is paid to HM Revenue & Customs (HMRC).

Naturally, you won’t want the government to ‘inherit’ your hard earned belongings so it is important to act now and secure your hard-earned estate for those you want to benefit most. Here is our best advice on how to avoid inheritance tax.

How Do I Avoid Inheritance Tax?

Most people consider how to avoid inheritance tax at some point in their lives. Here are our top ten tips to help you leave more to your family and loved ones and less into HMRC. Some of these strategies will require advice from a qualified IHT adviser who can advise you on all aspects of estate planning.

  1.  Gifts During Your Lifetime

One way to pass on your estate without incurring an huge Inheritance Tax bill  in the UK is to gift/transfer it to one or more of your beneficiaries. However, this must be done seven or more years before your death. Of course, there is often no way of predicting circumstances so far into the future but doing this also enables you to help out the family whilst you are alive. If you happen to die within seven years of making the gift, Inheritance Tax may be charged. Rates will be reduced if more than three years have passed.

  1. Personal Gifts

Gifts of up to a certain amount can be made free of Inheritance Tax.

Even in the last years of your life you have an annual gift allowance of:

  • Large gifts totalling no more than £3,000
  • Unlimited small gifts of up to £250
  • Wedding gifts of up to
    • £5,000 for your children,
    • £2,500 for your grandchildren, or
    • £1,000 for others

Certain gifts made alongside your regular pattern of income and normal expenditure (for example, a grandchild’s school fees/university fees/music lessons) can usually be made free of Inheritance Tax. To make sure HMRC understands what you have done, you should think about documenting this pattern for three or more years when thinking of how to avoid inheritance tax.

  1. Charitable Gifts

Gifts made to registered charities in your will can be made entirely free from Inheritance Tax.

Donations to charities can also help you to reduce the size of your estate to within the Inheritance Tax threshold.

Also, if at least 10% of your total estate is gifted to charity, it will reduce the rate of Inheritance Tax on your remaining estate (above the nil-rate band) from 40% to 36%.

Our Will writing service can advise you on all aspects of writing a will in the UK

  1. Life Insurance

If you take out a life insurance policy, written in an appropriate Trust which provides a lump sum on your death, this should be used to pay the resulting Inheritance Tax bill.

If this policy is within a Trust, the lump sum paid out on your death will not count towards your estate.

Life Insurance can also be taken out when making large financial gifts if you were to die within the intervening seven years. This is called a ‘term assurance’ policy.

  1. Pensions

Because of how pensions are taxed, they can then provide an income or a lump sum for your loved ones to enjoy, long after you are gone.

Typically, with some exceptions, pensions are excluded from the consideration of your estate, and can be passed on free from Inheritance Tax in the UK.

However, not every pension scheme allows this, so you need to check the conditions of your particular scheme. If it is allowed, it is important to name a beneficiary to whom you wish to pass on your pension.

You can also make payments into another person’s pension. This will protect this money from Inheritance Tax.

Passing on pensions is a complex area so always seek professional advice.  Our will writing service can advise you further.

  1. Discretionary Trusts

A discretionary trust can help you to reduce your Inheritance Tax bill by holding money in the name of your beneficiaries while you retain control. You can use your nil-rate band to save up to £325,000, which will be excluded from your estate after seven years. Funds above the nil-rate band may attract a lifetime tax charge.

  1. Loan Trusts

If you wish to protect your money by way of a trust but need to have the option to withdraw it if you need it, it’s possible to loan money to a trust. You will then have the option to withdraw the original capital you loaned but any growth will be protected from Inheritance Tax.

  1. Discounted Gift Trusts

If you would like to put aside an amount to be passed to a beneficiary on your death but want any income generated paid to you in your lifetime, you can use a discounted gift trust. This excludes the contents of the trust for Inheritance Tax purposes but still provides you with regular payments.

  1. Business Relief

Business assets can often be passed on either in your lifetime or after your death, with an Inheritance Tax relief of up to 100%.

A business, interest in business or shares in an unlisted company will usually qualify for 100% Business Relief.

Land, buildings and machinery related to the business will usually qualify for 50% Business Relief

So will shares controlling more than 50% of the voting rights of a listed company.

  1. Agricultural Relief

If you own agricultural property (a farm, land or pasture used to grow crops or rear animals as part of a working farm), this can usually be passed on in your lifetime or after your death free from Inheritance Tax.


Need Some Advice?

Get in touch. We can look at your current estate and finances with you and work to identify ways to reduce a potential IHT bill in ways that suit you and your family best.

We can help you with writing a will in the UK and discuss all aspect sof inheritance tax planning UK

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