Inheritance tax is a tax that is paid on the value of someone’s estate upon their death In the UK, inheritance tax is charged at a rate of 40% on assets above a certain threshold, which is currently set at £325,000 With property prices on the rise and the threshold remaining the same, more and more people are finding themselves caught in the inheritance tax net However, there are several ways to legally avoid or reduce the amount of inheritance tax that your loved ones will have to pay Here are five strategies to consider:
1 Make Use of the Nil Rate Band
The nil rate band is the amount of the estate that is not subject to inheritance tax Currently set at £325,000, any assets below this threshold are exempt from inheritance tax Married couples and civil partners can also benefit from the transferable nil rate band, which means that if one partner dies and their estate is below the threshold, the unused portion can be transferred to the surviving partner, effectively doubling the nil rate band to £650,000.
2 Take Advantage of the Residence Nil Rate Band
In addition to the standard nil rate band, there is also a residence nil rate band that can be claimed if you pass on your main residence to your direct descendants, such as your children or grandchildren This allowance is currently set at £175,000 per person and will increase to £175,000 in the 2020/21 tax year This means that a married couple or civil partners can potentially pass on up to £1 million tax-free to their children or grandchildren.
3 Consider Making Gifts
One of the most effective ways to avoid inheritance tax is to make gifts during your lifetime As long as you survive for at least seven years after making the gift, it will not be subject to inheritance tax how to avoid inheritance tax uk. There are also other gift exemptions to consider, such as the annual exemption of £3,000, which allows you to gift up to £3,000 tax-free each year, as well as small gifts of up to £250 per person per year.
4 Set Up a Trust
Another way to avoid inheritance tax is to set up a trust By placing your assets in a trust, they will not be considered part of your estate for inheritance tax purposes This can be especially useful if you want to provide for your children or grandchildren but are concerned about them inheriting a large sum of money at a young age By setting up a trust, you can control how and when the assets are distributed.
5 Invest in Business Relief Qualifying Assets
Business relief is a tax relief that is available on certain types of business assets, such as shares in qualifying unlisted companies or stakes in trading businesses If you hold these assets for at least two years before you die, they will be exempt from inheritance tax This can be a useful strategy for individuals who own a business or have investments in unlisted companies, as it can significantly reduce the amount of inheritance tax that their loved ones will have to pay.
In conclusion, there are several strategies that you can use to avoid or reduce the amount of inheritance tax that your loved ones will have to pay By making use of the nil rate band, residence nil rate band, making gifts, setting up a trust, and investing in business relief qualifying assets, you can ensure that more of your estate goes to your heirs instead of the taxman It is important to seek advice from a financial planner or tax advisor to ensure that you are taking advantage of all the available tax planning opportunities and that your estate is structured in the most tax-efficient way possible By taking proactive steps to mitigate your inheritance tax liability, you can leave a lasting legacy for your loved ones without the burden of a hefty tax bill