Inheritance tax (IHT) can significantly reduce the wealth passed down to your loved ones. However, with careful planning, you can lighten its impact and ensure that more of your hard-earned assets go to the people and causes you care about. In this blog, we’ll discuss some effective inheritance tax planning strategies to protect your estate for future generations.
Understand Your Inheritance Tax Liability
In the UK, inheritance tax is payable on the value of your estate above the current threshold of £325,000 per person. Anything above this threshold is taxed at a rate of 40%. Married couples and civil partners can transfer their unused allowance to each other, effectively doubling the threshold to £650,000.
Start Planning Early
One of the most effective inheritance tax planning strategies is to start early. By planning ahead, you have more options available to you and can make use of various tax-efficient vehicles to reduce your inheritance tax liability.
Make Use of Tax-Free Allowances and Exemptions
There are several tax-free allowances and exemptions that can help you reduce your inheritance tax liability:
- Annual Exemption: You can give up to £3,000 each tax year without incurring inheritance tax.
- Small Gifts Exemption: You can make small gifts of up to £250 to as many people as you like each tax year.
- Wedding Gifts: You can give up to £5,000 to a child as a wedding gift, while grandchildren can receive up to £2,500, and anyone else can receive up to £1,000.
- Gifts out of Income: You can make regular gifts out of your income without incurring inheritance tax.
Consider Making Use of Trusts
Trusts can be an effective way to pass on assets to future generations while reducing your inheritance tax liability. There are several types of trusts available, including:
- Bare Trusts: Assets in a bare trust are immediately owned by the beneficiary, but the trustee retains control until the beneficiary reaches a certain age.
- Discretionary Trusts: The trustees have discretion over how the assets are distributed, which can be useful if you want to protect assets for future generations.
- Life Interest Trusts: The beneficiary has the right to receive income from the trust assets during their lifetime, with the capital passing to other beneficiaries upon their death.
Consider Making Use of Business and Agricultural Relief
Business and agricultural relief can help reduce the value of certain assets for inheritance tax purposes:
- Business Relief: Business assets, including shares in qualifying unquoted companies and land, may qualify for business relief, reducing their taxable value by either 50% or 100%.
- Agricultural Relief: Agricultural property may qualify for agricultural relief, reducing its taxable value by either 50% or 100%.
Consider Making Use of Exempt Assets
Some assets are exempt from inheritance tax altogether:
- Assets Passing to a Spouse or Civil Partner: Assets passing to a spouse or civil partner are exempt from inheritance tax.
- Assets Passing to Charity: Assets passing to charity are also exempt from inheritance tax.
Review Your Estate Regularly
It’s important to review your estate regularly to ensure that your inheritance tax planning remains effective. Circumstances can change, so it’s essential to keep your plans up to date and make any necessary adjustments.
Conclusion
In conclusion, inheritance tax planning is an essential part of managing your estate and ensuring that more of your assets pass to your loved ones. By starting early, making use of tax-free allowances and exemptions, considering trusts and reliefs, and seeking professional advice, you can minimise your inheritance tax liability and protect your estate for future generations.
Here at The Will Centre, our dedicated and friendly team will advise you based on your personal circumstances and on your wishes ensuring you’ve got things organised for your loved ones.
