Whenever Brits are polled on their most hated tax, without fail, one tax in particular always finishes top – inheritance tax. As a nation, we want to leave as much as we can after death to our loved ones and the thought of the taxman taking a slice evidently gets our goat.
Here are some simple and efficient ways to reduce your inheritance tax liability and to ensure you leave as little as possible to the taxman.
Making a Will
Did you know that failing to write a Will generally means you will end up paying more inheritance tax? Without a Will in place, your estate will be doled out according to the rules of intestacy, and chances are the taxman will help himself to a healthy chunk of it.
Did you also know that one simple way to reduce your inheritance tax via your Will is to leave some to charity, as these gifts are free of tax?
Understand the thresholds
Inheritance tax is charged on estates once they pass £325,000 in value, at a rate of 40% on everything above that value. However, couples are able to pass their allowance over in full to their partner – in other words, couples have a £650,000 allowance overall. If their combined estate ends up being worth less than that, there will be no tax to pay.
There is also a new additional element to bear in mind here. The ‘main residence’ allowance allows you to pass on your family home to a direct descendent, with an additional tax-free allowance included. For this year it stands at £100,000 and will increase each year until 2020/21 when it hits £175,000. As this allowance applies per person, it will mean a total tax-free allowance of £1 million for couples.
Even if you give something away, the taxman will still class it as being part of your estate if you die within seven years of making the gift. It’s a way of preventing people from handing over their home on their deathbed and avoiding the duty. Live longer than seven years and there’s no tax to pay.
However, there are certain gift allowances anyway which are free of tax. Everyone has a £3,000 limit each year, and what’s more this limit carries over to the following year if you don’t use it, to a maximum of £6,000.
On top of that you can give away £250 to each of any number of people every year, while further allowances are in place for wedding gifts to family members, friends and even political parties.
Write your life insurance policy in Trust
Lastly, it’s a good idea to write your life insurance policy in Trust, as this essentially separates it from the rest of your estate.
Usually your life insurance payout will be added to the value of your estate before it is paid out to your loved ones, meaning they have to wait a while in order to receive anything and then may have to pay tax on that payout too.
But writing it in Trust means it is viewed as being outside of your estate, ensuring that your loved ones get every penny and likely get the money quicker to boot.
If you need some help in making the most of your allowances, writing a Will, setting up Lasting Powers of Attorney or Trusts, then speak to a member of the team at legalmatters on 01243 216900 or email us at firstname.lastname@example.org to find out more.