How to avoid Inheritance Tax

How to avoid Inheritance Tax

As Wills and Probate practitioners, we are seeing an increasing fear of inheritance tax.

People all around the country want to pass on their hard-earned assets without their beneficiaries having to pay part of it to the tax man, which is understandable. But many people don’t understand when inheritance tax is payable, and if it is then how can you reduce or even remove that liability?

Basics of Inheritance Tax

Assets (property, bank accounts, shares, Premium Bonds, life insurance etc) minus liabilities (credit cards, outstanding bills, personal loans, mortgages) are what make up your “estate” when you die.

Inheritance tax is rarely charged on estates worth less than £325,000. Therefore if your estate is worth less than this, there are only limited circumstances where you might pay inheritance tax.

If you also own your own home and you intend to pass it on to your children, grandchildren or great-grandchildren, then you can often claim an additional tax allowance of £175,000. This means you could give away up to £500,000 without paying inheritance tax.

If you are married then the news gets better – in certain circumstances, you can combine your allowances with your spouse or civil partner’s allowances. £500,000 + £500,000 means that you could give away up to £1 million free of inheritance tax when you are both gone.

This means that most people will not pay inheritance tax. But what if your estate is worth more than this – for example if you live in London (where house prices are significantly higher than elsewhere in the country), or if you have a second property?

If your estate goes above the allowances set out above then inheritance tax could be charged at 40% on the value in excess of that figure. As an example, if your estate is worth £550,000 you would pay inheritance tax on the £50,000 which is above your allowances, not the whole amount.


How can I reduce any Inheritance Tax?

If you think the value of your estate might mean that you need to pay inheritance tax, you should seek professional advice on lifetime inheritance tax planning.

Here at Lawson West, we can provide this type of advice standalone, or in conjunction with preparing a Will. You can contact the team on 0116 212 1000 or 01858 445 480 to book an appointment.

By way of an overview, you can reduce or even eliminate inheritance tax by utilising the following:

  • Making gifts of cash or assets. If you are feeling philanthropic, all gifts to charities are free of tax. Alternatively if you are thinking of benefitting your children or grandchildren, you might want to think about making gifts to them during your lifetime. Everyone can give away up to £3,000 per year without it affecting their inheritance tax position, but if you want to give away more then you will need to live for another 7 years to avoid any inheritance tax being payable on the gift.

  • If you are a farmer, you may be able to claim inheritance tax relief on 50% or even 100% of the value of the farming assets. You should seek professional advice on whether your assets qualify and how to maximise the relief.

  • If you hold shares in an unquoted business, for example a family business, or if you run a business as a sole trader or in partnership, the value of the business and/or its assets could also benefit from 50% or 100% relief from inheritance tax. Again, you should seek advice on the reliefs and eligibility during your lifetime to maximise these reliefs.

  • Making gifts on ‘customary occasions’. You are allowed to give cash gifts to specific people on birthdays, Christmas, weddings or other special occasions. The amounts you can give are prescribed by law and so you should check the position if you wish to use this allowance.

  • My favourite tax planning tool – spend it! If you have a large cash surplus then enjoy it, whether that’s buying a nice car, going on an expensive holiday or buying designer clothes. If you have worked hard to earn your money then you should enjoy it.

At Lawson West, our Probate Wills and Trusts team has experience in providing inheritance tax planning advice and we can work in conjunction with existing accountants or financial advisors where necessary.

For more information about our services, or to book an appointment to discuss estate planning, please Contact Us.

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