You might think that inheritance tax is unavoidable, but actually the opposite is true. With careful planning and advice from a personal tax accountant it’s possible to reduce the inheritance tax owed on your estate – or even to avoid paying it altogether.
The key is not to put it off. The earlier you start estate planning the easier it is to lower your loved ones’ inheritance tax liability. So why wait? Just follow these simple steps to reduce the financial burden on your loved ones and ensure more of your life’s savings are retained by those you leave behind.
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Leave your estate to your spouse
One of the simplest ways of avoiding inheritance tax is by leaving everything to your spouse in your will. This is because inheritance tax isn’t payable on assets inherited from a spouse (the same applies to couples in a civil partnership).
Specifying your spouse as your sole beneficiary in your will is the surest way to avoid inheritance tax and safeguard your estate.
If you fail to make an officiated will, your assets can be divided according to intestacy rules, which may result in an inheritance tax bill. Making a will while you’re living (and of sound mind) is the only way to ensure that your assets will be distributed according to your wishes.
Take out life insurance
Another great way you can avoid having to pay inheritance tax is by taking out a life insurance policy.
Having life insurance means that a lump sum of money will be paid to a nominated beneficiary (or beneficiaries) in the event of your death. You’ll have to pay the premiums for the policy while you’re living, but these are typically lower the earlier you take out the insurance.
Providing all payments are up-to-date, the amount you’re insured for should pass over to your beneficiaries when you die. This money can then be used to settle any inheritance tax liabilities.
Just be sure that you put the insurance policy into trust so it falls outside of your estate, otherwise inheritance tax may be owed on this too.
Gift your assets while you’re alive
Giving your assets away while you’re still living is a great way to avoid inheritance tax – or, at the very least, reduce the amount you have to pay.
How much you can give away tax-free each year is subject to a gifting allowance, so there are limitations, but there are exceptions that allow you to gift more in specific circumstances, for example towards a wedding.
If you don’t use your entire gifting allowance in a single tax year you can even carry it forward, allowing you to gift a higher amount the following year while still remaining under the threshold.
It’s also OK to gift a one-off payment above the tax-free threshold in a single year. However, should you die within the next seven years the payment would become liable for inheritance tax, but as the percentage of IHT owed on gifts decreases over time, you could still end up reducing your inheritance tax bill this way.
Put your estate or assets into trust
Another popular method people use to avoid paying inheritance tax is to put their estate or assets into trust.
A trust is a legal agreement whereby your assets become managed by an appointed trustee or trustees. It sounds complicated and it is, which is why it’s best to consult with a personal tax specialist if you want to progress with this route.
The benefit of putting your assets into trust, however, is that this can exempt them from inheritance tax.
Pay more into your pension
Because pensions don’t form part of your taxable estate, they can easily be passed onto loved ones without incurring an inheritance tax bill. In fact, should you die before the age of 75, the entire pot can be inherited as a tax-free lump sum, within the current lifetime allowance threshold.
Saving more into your pension, therefore, is a great way to reduce your inheritance tax bill, whilst still giving you access to money you can use to live on in retirement.
Keep your estate below the inheritance tax threshold
Of course, another way your beneficiaries can easily avoid paying inheritance tax is if no inheritance tax is owed in the first place. A sure-fire way to guarantee this is by keeping your estate below the government’s inheritance tax threshold which, at the time of writing, equates to £325,000 for individuals (locked in until 2026).
Along with giving away and gifting your assets each year while you’re alive, you could also spend your hard-earned money on enjoying your retirement years too – for example, taking that long-distance trip you’ve always dreamed of! The closer you are to the inheritance tax threshold when you pass away, the less inheritance tax your beneficiaries will have to pay when they inherit your estate.
It’s never nice to think about leaving those we love behind, but a little forward-planning now can save your loved ones a lot of financial stress in the future.
Talking to a specialist in this area is the best way to put your affairs in order and ensure that you’re doing everything in your power to reduce the inheritance tax liability payable on your estate.
