Six ways to reduce inheritance tax
Posted on 17th May 2019
Inheritance tax (IHT), normally at 40%, affects estates worth more than £325,000. The value of your estate is made up of property, money and possessions, after any debts have been settled.
A study by the financial services company, Canada Life, says Her Majesty’s Revenue and Customs (HMRC) collected £5.4billion of IHT in the financial that ended in April.
This is an increase of £200million on the previous year and £600million more than in 2017. The study predicts that the amount collected is likely to rise to £10billion by 2030.
As property prices increase, more families are likely to find themselves liable for IHT. Here are some ways you can reduce the amount of IHT to be paid from your estate.
1. Leaving property to direct descendants
If you and your partner are home owners, you can leave property valued up to £950,000, free of IHT, to your children or grandchildren and their partners. This residence nil-rate band (RNRB) was introduced in 2017. It will increase one final time in 2020, allowing you to leave up to £1million in property to your direct descendants.
2. Annual gift exemptions
You can give gifts of up to £3,000 each tax year, without any IHT implications. You can even carry forward any unused allowance to the next tax year, but only once. So, if you give away £1,000 in year one, you can give £5,000 the following tax year.
3. Wedding gifts
In addition to your annual gift exemption, you can also make wedding gifts of up to £1,000 per person, free of IHT. If the gift is to your grandchild, you can give them £2,500 or £5,000 to your child. Husbands and wives can both make these gifts from their own individual allowances.
4. Regular donations or financial assistance
You can also give financial help to an elderly relative or a child under 18. Payments made to charities or political parties are also exempt. Small payments of up to £250 can be made to any number of people, as long as you haven’t already given them another exempted payment in the same tax year.
5. Larger transfers
You can make larger transfers of money free of IHT as long as you live for seven years after making the gift. If you die within seven years, tapered tax relief applies on the tax owed. If you die within three years, then the full 40% is still due. The tax rate will then drop by 8% per cent a year, reaching 0% at seven years.
6. Assets in trust
You can set up a trust to manage assets for your children, for example. A trust will allow you to give away assets but still retain some benefit from them. Once in a trust these assets are no longer considered part of your estate, as long as you survive for seven years. However, IHT might be due if the value transferred is more than your RNRB allowance.
Please get in touch if you would like to discuss making a Will to leave your assets tax efficiently to your loved ones .
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