Inheritance Tax – How Forward Planning Can Save £1,000s

Reader's Digest Editors

Having worked hard and paid your taxes all your life, many people feels it’s unfair to be taxed again when you die. The good news is you can do something about it!

Simply by taking professional advice and planning ahead, there are several ways to keep your future ‘death tax’ bill to a minimum.

People often ask “How much is inheritance tax?” or “What will it cost me?”, but it’s not as cut and dried as that.

Each case is different and depending on your family structure and the terms of your will there are a number of factors to consider.

To help give you some answers as to your exact inheritance tax liability and what you can do about it, we’re offering Reader’s Digest readers a Free Inheritance Tax Check.


Your Tax Free Allowance

The current inheritance tax (IHT) nil rate band (or threshold) is £325,000 per person (frozen until 2020/21). This equates to £650,000 for married couples. Widows and widowers have a £325,000 allowance plus any unused part of their deceased spouse’s allowance.

Your allowance is higher if you leave your home to your children or grandchildren, thanks to the recently introduced Residential Nil Rate Band (RNRB). This is being phased in in 2017/18, starting at £100,000 and increasing until it reaches £175,000 in 2020/21.
 

Please note though that if your total estate is worth more than £2 million, £1 of the RNRB allowance will be removed for every £2 over the £2million threshold.

Anything that falls outside of your allowance is liable to 40% tax. To better illustrate this, if your estate is worth £475,000, tax will be charged on £150,000 (the amount above the £325,000 limit); therefore the sum payable to the tax man by your beneficiaries would be an eye watering £60,000.

To find out your exact liability and what you can do about it from the best rated independent financial adviser near you (based on client reviews on VouchedFor), request a Free Inheritance Tax Check.

Your Options

There are a number of legal ways to slash the amount of IHT or Estate tax your executors shell out. Here’s just a few -

  1. Pensions

In most situations, pensions are exempt from IHT, particularly if you die before 75. If you are over 75 when you pass away, your beneficiaries will pay income tax at their individual rates of income tax.

  1. Business Property Relief

If you own shares in qualifying businesses, they could qualify for 100% business property relief if they are held at death and for 2 of the previous 5 years. An independent financial adviser can help advise you on which investments would qualify.

  1. Charitable gifts

Gifts to charity or political parties are exempt from inheritance tax and will reduce the overall tax payable on your estate from 40% to 36% if you leave 10% or more of your net estate to charity. 

  1. The 7 year rule

In most cases you can make sizeable gifts which will become increasingly exempt from IHT until becoming totally exempt after 7 years.

  1. Other exempt gifts

There are a few other types of gift that are exempt from IHT, examples include; an annual gift of £3,000 which can be carried forward by one year if it is unused, unlimited £250 gifts, gifts between spouses and gifts of up to £5,000 for children getting married or £2,500 for a grandchild or great grand-child getting married.

      6.     Trusts

Putting assets and life insurance into trusts can also be an effective way to reduce your IHT liability and make dealing with your estate easier for your executors. Trusts can be complicated, an independent financial adviser can advise on the right course of action for you here.

If you’re serious about IHT planning and want to avoid any of the more complex taxation and legal pitfalls then we recommend requesting a Free Inheritance Tax Check online. Alternatively you can call 0203 641 0346.