5 ways to avoid inheritance tax

After your death, you may wish for your children or other beneficiaries to inherit your estate, but inheritance tax may reduce how much of your estate is actually available to them. Since inheritance tax could potentially cost your loved ones thousands of pounds, it is essential to plan what happens with your estate in advance and look at ways to avoid inheritance tax

This article will provide 5 ways to avoid inheritance tax, preventing the devaluation of your estate and ensuring your loved ones benefit the most following your passing.

There are many tools available to you when wishing to calculate the potential inheritance tax bill. These include the Inheritance Tax Check, a free service provided by tax professionals who will also provide useful guidance going forward.

How does inheritance tax work?

Upon your death the Government will evaluate the worth of your estate, deduct any owed debts, before providing a final valuation. The assets of your estate may include:

  • Money in your open bank accounts
  • Any investments you have made
  • Owned properties and/ or businesses
  • Vehicles
  • Money owed from life insurance policies

How to avoid inheritance tax in 5 simple steps

  1. Make a will

The creation of a will is a simple way to avoid your assets being liable to inheritance tax, as well as providing control over how your assets are distributed following death. A will can also aid in avoiding the taxation of your assets if they are to be inherited by your spouse.

If you leave a will and appoint an executor, the executor must get a ‘grant of probate’.  The executor’s role is to gather any remaining assets, pay outstanding bills and distribute what remains according to the will. 

Probate refers to the process of applying for the grant and the document used to manage the estate. Not everyone is required to use probate, so it is advised that you seek advice from HMRC.

Probate fees are an essential part of the process, but there is no need to spend £1000s to get through it. Probate application fees are £155 if you apply through a solicitor, while estates worth less than £5000 pay no fee.

  1. Stay below the inheritance tax threshold

In the 2019/2020 tax year, the inheritance tax threshold for individuals is £325,000. This taxation bracket is extendable to a spouse or civil partner, equating to a threshold of £650,000. 

In 2015, the Summer Budget announced a ‘main residence transferable allowance’, which will eventually allow some people to avoid inheritance tax on owned properties. This allowance will gradually increase form £100,000 to £175,000 between 2017 and 2020/2021.

In the current tax year, the main residence transferable allowance is £150,000, in addition to the inheritance tax threshold.

You may be able to reduce the value of your estate through equity release, which can help you stay below the threshold and minimise the inheritance tax liability when you die.

  1. Put your assets into a trust

You can avoid inheritance tax by placing your assets within a trust, which do not become a part of your estate upon death, avoiding inheritance tax.  A trust could provide financial support for your children once they become adults, or perhaps support a family member with any health conditions of their own.

Assets transferred into a trust within your lifetime may be liable to Capital Gains Taxation; therefore it is advised that a trust is established within your will. Some trust funds may be liable to taxation as a consequence of their own tax regimes, so it is recommended you seek expert advice when considering opening a trust.

Alternatively, you can look at how equity release works to see whether you can cash in the value of your home now and do something else with your assets.  

  1. Gift your assets

If you give away assets and then survive for at least 7 years, all gifts are void of inheritance tax. However, if you die within 7 years, the inheritance tax will be paid at a reducing rate. You may also give gifts of up to £3000 inheritance tax free each year. 

  1. Take out a life insurance policy

It is possible to cover any inheritance tax liability by taking out a life insurance policy for your estate’s inheritance tax bill. By then placing the policy within a trust, the bill can be paid outside of your estate, without facing any taxation consequences.

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