Inheritance tax: Five ways to REDUCE your bill and keep more of your estate

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Known as the death tax, IHT is a levy paid on the value of a person’s estate – made up of property, money and possessions – once all relevant debts have settled. For an estate worth more than the £325,000 tax threshold, a tax of 40 percent must be paid to the Government. Research last week revealed the taxman took an extra £164million in inheritance tax for the 2018-19 financial year compared to the previous 12 months, an increase of 3.1 percent. It takes the total sum for the 12 months to £5.369billion, according to analysis of HMRC receipts by financial advice firm, NFU Mutual.

Death taxes are forecast to double in a decade, with research by The Mail on Sunday claiming the total bill is likely to jump to £10billion a year by 2030.

With more IHT going to the taxman than ever before, families will be wondering if there is anything they can do to reduce their bill.

Neil Jones, wealth management and tax specialist at financial services experts Canada Life told Express.co.uk, said: “You may think IHT only applies to millionaires, but be wary – every year more people are caught by the tax, and many of them aren’t what you might call ‘rich’.

“They’re often surprised by how much their own homes have increased in value over the last ten years, leading to a nasty surprise for their beneficiaries.

“Inheritance tax has classically been called a ‘voluntary’ tax, as there are so many options when it comes to escaping its reach.

“Just like ISAs, these are legal opportunities that are designed to help shelter your assets from tax, to further the savings culture and help pass on money to your loved ones.

“If you would rather your money went to families, friends and worthy causes close to your heart, then you should seriously consider how you can reduce your inheritance tax bill.

“The first step is to create a plan.”

PLAN AHEAD – USE TRUSTS

There are a wide range of trusts available, where money, property or investment will be looked after by a third person for chosen beneficiaries.

This could be for a child or another loved one.

Once the asset has been put away in a trust, it is no longer considered part of someone’s estate, so long as the individual lives longer than seven years.

Should the person die within seven years of making a transfer into the state, the person intended to receive the asset will be required to pay inheritance tax.

Gifts to charities are exempt from IHT and if enough is left to charity in a will, then inheritance tax falls to 36 percent.

MAKE USE OF EXEMPTIONS AND RELIEFS

Everyone is entitled to make certain gifts which are exempt from inheritance tax.

This ranges from the annual gift exemption of £3,000 to small gifts of £250 – providing it is to someone who has not received the £3,000 gift.

People who are married or registered civil partners do not have to pay any inheritance tax on money or property left to them by their spouse.

However, it is worth nothing this could just defer the liability to when they die.

As inheritance tax is a tax on capital transfers, gifts of income are exempt.

The donor needs to have true surplus income and the gift must be regular and not affect their standard of living or they must not use capital to subsidise it.

INSURE THE TAX LIABILITY

As inheritance tax applies when you die, you can take out a life assurance policy held under a suitable trust that pays out on death.

Canada Life suggests the cost of the life assurance could be significantly lower than the inheritance tax liability.

The premiums could qualify as surplus income under the exemption or the cost could be borne by the beneficiaries, after all it is they who will ultimately benefit.

LEAVE YOUR PENSION AND USE OTHER ASSETS

Personal pensions offer valuable estate planning benefits as the fund can be passed on free of inheritance tax and can cascade to different beneficiaries.

Relatives can claim the pension pot of a loved one tax free, providing the person died before the age of 75 and have not touched their retirement stash.

However, the viability of this depends on other money and assets the person has to live on to maintain their lifestyle, aside from their personal pension.

SPEAK TO A PROFESSIONAL ADVISER

There are a wide variety of solutions available to help reduce or plan for an inheritance tax liability and the key advice is to always speak to a professional adviser. 

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