Inheritance Tax Planning

What is Inheritance Tax?

Inheritance Tax (IHT) is a tax on the estate (property, money, and possessions) of someone who has passed away. In the UK, the current standard rate is 40%, but there are various ways to reduce this through effective planning.

What Inheritance Tax Planning Can Help You Do?

• 1. Preserve Your Wealth:Proper tax planning helps you preserve more of your estate for your loved ones, ensuring that your wealth is passed down according to your wishes.
• 2. Reduce Tax Liability:There are numerous legal strategies to reduce the amount of inheritance tax payable, which can significantly benefit your beneficiaries.
• 3. Avoid Financial Stress:Planning ahead can prevent financial stress and disputes among family members after your death, making the process smoother for everyone involved.
• 4. Ensure Your Wishes Are Honoured:Effective planning ensures that your estate is distributed according to your desires, rather than being heavily impacted by taxes.

Key Inheritance Tax Thresholds and Rates

• 1. Nil Rate Band:The first £325,000 of your estate is free from inheritance tax. This is known as the Nil Rate Band. Any amount above this threshold is typically taxed at 40%.
• 2. Residence Nil Rate Band:An additional £175,000 may be available if you pass on your home to your children or grandchildren. This can increase your tax-free threshold to up to £500,000.
• 3. Spouse and Civil Partner Exemption:Transfers between spouses and civil partners are usually exempt from inheritance tax, allowing you to pass your estate to your partner tax-free.

6 Effective Inheritance Tax Planning Strategies

Here’s a few of our top tips to consider:

Make Use of Annual Exemptions: Each year, you can give away up to £3,000 worth of gifts without them being added to the value of your estate. You can also carry forward any unused allowance from the previous year.

Give Money Away: Gifts given more than seven years before your death are generally exempt from inheritance tax. This is known as the seven-year rule. Regular gifts from your income (that do not affect your standard of living) can also be exempt.

Set-Up Trusts: Placing assets in a trust such as Property Trusts, Pension Trusts and Savings Trusts can help reduce your estate’s value and control how your assets are distributed. Trusts can be complex, so it’s important to get professional advice.

Make Charitable Donations: Any amount left to a registered charity is exempt from inheritance tax. Additionally, if you leave more than 10% of your estate to charity, the inheritance tax rate on the remaining estate can be reduced to 36%.

Review Your Will Regularly: Ensure your Will is up-to-date and reflects your current wishes and financial situation. Regular reviews can help you take advantage of any changes in tax laws or personal circumstances. If you need a helping hand, take a look at our Will Review Services.

Utilize Business Property Relief: If you own a business or certain agricultural assets, you may be eligible for Business Property Relief, which can significantly reduce the value of these assets for inheritance tax purposes.

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Common Questions About Inheritance Tax Planning

What Happens If I Don’t Plan for Inheritance Tax?

Without proper planning, a significant portion of your estate could be lost to inheritance tax, leaving less for your beneficiaries. Your estate might also face delays and additional costs during probate.

Can I Avoid Inheritance Tax Completely?

While it’s challenging to avoid inheritance tax entirely, effective planning can significantly reduce the amount payable. Using allowances, exemptions, and strategic gifting can help minimize the tax burden.

When Should I Start Inheritance Tax Planning?

It’s never too early to start planning. The sooner you begin, the more options you have for reducing your estate’s inheritance tax liability and ensuring your wishes are honoured.

Do I Need a Financial Adviser?

While you can do some inheritance tax planning on your own, professional advice from firms like us at Joslin Rhodes can help you navigate complex tax laws and identify the most effective strategies for your situation.