How to Manage Inheritance Tax

No one likes to think about it, but maybe it’s time to face up to the inevitable?

The Inheritance Tax Reality

Many people don’t realise it, but on their death their estate will owe tax at 40% on anything above the inheritance tax threshold of £325,000.

For many people, that’s the value of their home. Which means that a surprising number of people will find themselves caught in inheritance tax net.

Inheritance Tax to be scrapped on up-to-£1m homes by April 2020

in July 2015’s Summer Budget, former Chancellor of the Exchequer George Osborne announced that he’d scrap the duty when parents or grandparents pass on a home worth up to £1 million (£500,000 for singles). This is being phased in gradually until April 2020, however, it’s not completely in yet, and there are provisos, such as the home needing to be the main residence, not a second home.

Ignoring the Inevitable

In our experience, too many people ignore the issue of inheritance tax. Perhaps not wanting to consider the inevitability of their own demise. At the same time, quite often, family members avoid the subject. It’s perhaps understandable – not wanting to seem overly interested in what may become their inheritance.

Unfortunately, both these ways of thinking, though very common, don’t help anyone. The best advice anyone can be given is to deal with inheritance tax as soon as possible. This is the most effective way to secure a better future outcome for loved ones you are leaving behind.

Five Simple Ways to Reduce Inheritance Tax

If you think your estate might have to pay Inheritance Tax, here are five simple things you can do to reduce the taxman’s cut.

1. Make a gift to your partner

Giving away assets, setting up a trust or changing your will can help beat Inheritance Tax. But do make sure you pay attention to the legal details and tax consequences. You can give anything you own to your spouse or civil partner. However, if your spouse was born outside the UK, the amount you can give away might be limited. Doing this means that you won’t have to pay Inheritance Tax on what the gift’s worth.

The rules are very complicated so make sure you take advice before doing anything.

2. Give to family members or friends

Giving assets away to a friend or a family member who is not your spouse or civil partner has advantages. But the value of the gift will be included in your estate for Inheritance Tax for seven years. This means some making some forward planning. You can give away limited amounts every year and not have to pay Inheritance Tax. However, there might be Capital Gains Tax to pay on certain assets that you give away in your lifetime. Your advisor can help you define what you can give and when.

3. Set up a trust

Putting cash, property or investments into a trust, which you, your spouse and none of your children under 18 years can benefit from, means that it is no longer part of your estate for Inheritance Tax purposes.  You can set up a trust right away or you can establish one in your will. There might be Capital Gains Tax consequences if you transfer certain assets into a trust in your lifetime, but there will be no liability to Capital Gains Tax if you establish a trust in your will. Some types of trusts are subject to their own tax regimes and the rules around trusts are complicated so you must take advice from an expert.

4. Leave a gift to charity

Anything you leave to charity is free of Inheritance Tax so it can be a useful way of reducing your Inheritance Tax bill, while benefiting a good cause. If you leave at least 10% of your estate to charity, it will cut how much Inheritance Tax is due on the rest. It might not be a huge saving, but it can mean that family and friends will receive more than they would do otherwise – while your favourite charities also benefit.

5. Take out a Life Insurance Policy

A life insurance policy, won’t reduce the amount of Inheritance Tax due on your estate, but the payout can make it easier for surviving family to pay the bill. This could mean that family are able to prevent the family home from being sold. However, if you do this, make sure the life insurance payout goes into trust – if you don’t it will make your estate bigger and it will have to pay more tax.

How can we help you reduce Inheritance Tax

At Haven we have an experienced team with a diverse range of skills from specialists in accountancy, tax and also legal experts. We are able to draw on these skills to put together a personal plan to suit your individual requirements.

A no-obligation conversation with one of our team can help you decide what assets you plan to leave behind, and how you can make sure you and your family’s future is secured.