No one wants to leave behind a hefty bill for their family to deal with.

You have worked hard and paid taxes all your life, so if you don’t have to, why give the tax man another chunk when you die?

If no plans are made and your total estate value, i.e. all of your assets less any debts, exceeds a certain limit, those that you leave behind could be charged 40% tax on the excess. The limit is currently £325,000 per person or £650,000 per couple, which can increase in some cases to £500,000 or £1 million per couple if you have a family home that you intend to leave to your children via your Will.

There are a number of ways to reduce these potential charges, many of which will be more effective if you start thinking about this now and planning in advance.

Suggestions include:

This list is not exhaustive, and it is important to remember that some of these suggestions, such as making gifts, may result in immediate tax charges, so the full consequences and your individual situation should be considered before any action is taken.

What is Inheritance Tax?

Inheritance tax is the tax paid on assets left when someone dies. When you pass away, the government will assess how much your assets are worth, and then deduct your debts from this, to give the value of your estate. Let’s just drill down quickly into what your list of ‘assets’ could include:

  • Your investments
  • Your vehicles
  • Cash in the bank
  • Your home
  • Other properties or businesses that you own
  • Life insurance policy pay-outs

What is the tax burden? How much tax will I pay?

If your estate is over the IHT threshold of £325,000 (per person), you will be taxed at 40%. Married couples can often leave assets worth £650,000 without attracting inheritance tax (singles £325,000). 

Example: As an unmarried person, if you leave behind assets worth £400,000, your estate pays nothing on the first £325,000 and 40% on the remaining £75,000.

For those whose estates do not exceed £2million in total, a new ‘main residence’ property allowance was introduced in 2017 that allows you to leave your home to direct descendants (Children, Stepchildren, Grandchildren) tax-free. 

This was gradually introduced, starting at £100,000 for the first year (meaning a total allowance of £425,00) and has risen by £25,000 each year, so that from 2020 the tax-free amount is £500,000 for individuals and £1 million for married couples.

What if your estate is above the IHT threshold? Can you gift it?

If you are above the threshold, it may seem like a good idea to gift your home to your children. Easy, right? As long as you survive 7 years from the date you gift it, it’s theirs?

Unfortunately, it’s not that simple.

First, you’ll have to pay your children full market rent to live there. And they’ll pay tax on that rent. Otherwise it stays in your estate as ‘gift with reservation’.

On top of that, as a second home, they’ll also be subject to capital gains tax on the price rise when they do decide to sell.

Not to worry though – you can still offset this impact with other gifts.

Everyone has an annual tax-free gift allowance of £3,000, together with additional allowances for weddings and small gifts of up to £250 each. These are all relatively small unfortunately, but there are also plenty of options available that can have a greater impact, including gifts of other assets as long as you survive seven years, regular gifts out of excess income, loan trusts and discounted gift schemes.

If your estate is going to be liable to inheritance tax (IHT), consider leaving your estate to your grandchildren, instead of your children. This is referred to as ‘skipping a generation’. 

Instinctively, parents want to leave their estate to their children. But what if their children’s own estate is already liable to IHT itself? What’s the point in your children paying tax on their inheritance from you, only for it to be taxed again when they die?

Gifts out of income

Put simply, if you were to have, say, £100,000 pa year income, but only needed £50,000 in order to live your life, have holidays etc. you are able to give this away. 

Not only is it important that it doesn’t adversely affect your lifestyle, but you must keep accurate records from the start, as HMRC will investigate it.

Where any gifts are made, remember that there may be an immediate charge to Capital Gains Tax and/or a 20% Lifetime Charge depending on the type and value of the asset given away.  You should also ensure your Will reflects your wishes and if you are expecting a large tax bill, perhaps explore the possibility of insurance to cover some of this cost.

Overview of ways you may be able to cut your inheritance tax bill:

  • Make a gift to your partner (married or civil partnership).
  • Give to family members.
  • Put assets into a trust.
  • Leave something to charity (if you leave at least 10% of your estate to charity, it will cut your inheritance tax payment to 36%).
  • Take out some whole of life insurance (it could help your family pay for the IHT bill, but make sure it’s put into trust!).
  • Discounted Gift Trusts
  • Family investment LLPs structured correctly

Want to know more about these in depth? Let us help you to protect your family by giving you the personalised tax advice you need to feel secure.

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