There are a variety of approaches that can be taken to ensure that your heirs are exempt from having to pay any inheritance tax at all.
Is it possible to avoid paying inheritance tax?
When you die away, your heirs may be required to pay inheritance tax if the value of your estate is high enough.
But there are methods that you can reduce the amount of tax that your estate owes and maximise the amount that is left for your heirs.
In the following paragraphs, we will discuss some strategies that can help you reduce the amount of inheritance tax you owe, including:
Donating money to a charitable organisation
Leaving your estate to a spouse is a common practise.
Getting the most out of your property allowance
Taking equity release into consideration
Purchasing a life insurance policy
Through the use of a deed of variation
Before you make any donations or take any other steps toward managing your estate, we strongly recommend that you obtain professional guidance first.
Are you making a will?
You can create a will and have Which? examine it if you are interested in receiving assistance. Wills.
1. Make gifts
Spending or donating your money during your lifetime is one of the easiest ways to sidestep having to pay inheritance tax (IHT), which is one of the taxes that can be inherited by your heirs.
You are permitted to give away up to £3,000 as a gift throughout each tax year. This amount can be distributed among as many individuals as you see fit. You are also permitted to give infinite gifts to other people, each of which can be worth up to $250.
In the event that you are attending a wedding, you are exempt from paying inheritance tax on gifts of up to one thousand pounds that you make. You are able to contribute up to £2,500 to each of your grandchildren, and you can also give up to £5,000 to each of your children. In order for wedding presents to be considered potentially exempt transfers, they must both be given before the wedding and the ceremony itself must take place. Gifts given after the wedding will not be considered.
If you make gifts that are greater than the thresholds, the government may tax the gifts if you don’t live for another seven years after you make them. If not, they will be exempt from taxation as well.
Check out our articles on inheritance tax preparation and tax-free gifts for further information on those topics.
2. Donate money to a charitable organisation.
If the charity you give the money to is officially recognised by the government of the United Kingdom, the money will never be subject to inheritance tax. The same principle applies to donations made to local sports teams or political organisations.
Additionally, if you leave more than ten percent of your taxable assets to one of these groups in your will, the inheritance tax rate for the remainder of your estate will drop from forty percent to thirty-six percent. This change takes effect immediately.
Only the portion of your estate that is greater than the lifetime allowance is subject to the additional 10% tax. You would qualify for the lower rate if you gave more than £10,000, which is equal to 10 percent of the amount that is over £325,000. This would be the case, for instance, if you were leaving behind a total of £425,000.
3. Leave your estate to your spouse
No matter how much money or property you leave to your spouse or civil partner, they will never have to pay taxes on that money or property. Including this in your will and using it to its full potential will save your family a tidy sum of money.
Your spouse will inherit any unused portion of your personal allowance when they pass away, which will enable them to pass on up to an additional £325,000 as part of the main inheritance tax allowance.
If they (or you) have remarried, then any unused personal allowances can be joined together and handed on; however, this can only be done up to the value of one entire personal allowance, which means that the amount can grow by no more than £325,000.
Learn more about it here:
tax on couples’ estates and inheritances
4. Make use of available property allowances
If you plan to leave your inheritance to your children or grandkids, property allowances enable you to transfer a larger portion of your home to them without incurring additional tax liability.
Its value for each individual in the current fiscal year, 2022-2023, is 175,000 pounds. This results in an increase of £350,000 in the amount that is exempt from inheritance tax for married couples. When combined with the personal allowance, this means that estates worth up to £1,000,000 might be totally exempt from IHT in this year.
Our guide on inheritance tax and property might provide you with additional information.
5. Give some thought to equity release
If all of your fortune is invested in your property, it is possible that you may be unable to accept financial gifts during your lifetime or spend any of your wealth on yourself. Some people choose to participate in equity release programmes so that they can avoid this situation.
It is essential to keep in mind that the only thing that will actually happen as a result of this is a decrease in the assets you own and an increase in the debts that will count against your estate. It is likely better for you to give up assets sooner rather than later if you do not have a pressing need to acquire cash from your home.
The mechanics behind equity release programmes
Either you can take out a loan against the value of your home, which is known as a lifetime mortgage, or you can sell part of your home at a reduced market rate, but continue to live there throughout your life, which is known as a home reversion scheme. Both of these options are available through these schemes.
You have the option of spending the money yourself or giving it to your heirs when you release it. As long as you are still alive seven years after the gift was given, you won’t have to pay any tax on it.
When you die
When you pass away, the value of your estate will be decreased, either because of the outstanding mortgage obligation (in the case of a lifetime mortgage) or because just a portion of the value of your home will still belong to your estate. This can happen for one of two reasons (with a home reversion).
Take a moment to ponder
Even though it doesn’t seem complicated, you should give it some serious thought before proceeding in this direction. Because the interest on lifetime mortgages is “rolled up,” the total amount owed can quickly increase.
For illustration purposes, a mortgage for £50,000 with an annual interest rate of 7% will almost double in value within ten years, reaching a total of £98,358. Your heirs won’t gain in either scenario since you could end up owing more money to your lender than the amount of tax that your estate would have been required to pay.
The alternative involves selling off a portion of your property for an amount that is lower than its market value. Consider, therefore, whether you would be ready to allow the bank to take half of your home in order to prevent the government from gaining a portion of it.
Consult an expert
If you do believe that equity release could be beneficial to you, we strongly suggest you to seek the guidance of an impartial financial advisor who specialises in equity release before moving forward with the process.
Discover more with our comprehensive guide to equity release.
6. Get yourself a policy for life insurance.
You have the option of purchasing insurance against an IHT bill if you are unable to contest it. This is one of the simplest ways to cover an unexpected bill, but the cost could be large if you are not relatively young and healthy. If this describes you, consider another option.
As long as the payout is made into a trust, it will not be considered part of your estate when you pass away. Our guide to trusts and inheritance tax will provide you with additional information.
If you pay the premiums for the insurance policy yourself, the HMRC considers those payments to be a lifetime gift. However, if you qualify for one of the tax-free exemptions, such as the annual exemption of £3,000 or the exemption for “gifts out of normal income,” these payments are typically exempt from taxation.
7. Have you thought about a “deed of variation”?
Your heirs have the ability to change the terms of your will after you pass away by using a document called a deed of variation. This could result in a portion of the inheritance being given to someone else.
Within the first two years after your passing, they have the ability to draught a deed of variation; however, all beneficiaries affected by the will must give their consent to the variation.
In actual fact, this can be challenging, particularly if there are a large number of beneficiaries.
It is recommended that you examine your will on a regular basis in order to ensure that your affairs are handled in a tax-efficient manner.
This will make the process of probate much easier for your executor, and it will lessen the likelihood that your loved ones will fight among themselves, which is tragically something that may happen very frequently.