Inheritance tax or IHT is paid on everything of value that you own when you pass away.
It includes: Your property (including any overseas property), any land, savings and investments, cars, jewellery and any art. When you pass away anything you own is called your estate, and all of it will be subject to IHT unless you leave your estate to your spouse or civil partner. The current IHT threshold is £325,000 which has been frozen until the 2020/2021 tax year is complete. IHT bills can often be expensive and can be minimised by effective legal IHT planning, follow the tips below to plan your estate and reduce your IHT bill.
Write a Will
Before you even start estate planning it’s vital that you have an up to date will. Creating a will is one of the most important ways to ensure your estate is given to the intended recipients. It’s also important to keep your will updated. Older wills will hold assets in trust which you could lose out on if your will isn’t kept updated. It’s important to seek legal advice when writing a will as an expert will be able to provide you with up to date support and will also be able to help you with the best option for your estate.
Most individuals wait until death to share their wealth, when in fact sharing your wealth before death may be more tax efficient. Lifetime gifts are exempt from IHT and allow you to see the benefit of your lifetime gift to the recipient while you’re alive. Lifetime gifts as following are exempt from IHT.
- Every year you can give away £3,000 in total as lifetime gifts.
- You can donate £250 to any number of individuals.
- You can donate extra for wedding gifts. Parents = £5000, grandparents = £2500 and anyone else £1000.
- Donations of any amount to charities
It’s also possible to reduce the amount of IHT you pay on certain goods by giving a lifetime gift. See the table below or details of IHT reductions from lifetime gifts.
|Number of years between gift and death||Tax % paid|
|0 – 3 Years||40%|
|3 – 4 Years||32%|
|4 – 5 Years||24%|
|5 – 6 Years||16%|
|6 – 7 Years||8%|
|7 + Years||0%|
Pensions are a great way to avoid paying IHT altogether, and in the worst circumstance, a beneficiary will only pay income tax rates. Funds left in a pension will be given to a beneficiary stated in the will, but the final amount they will receive depends on your age. If you are below 75, they will receive the full pension amount. If you pass away over 75 then the beneficiary will pay their standard income tax on the amount.
If you need help on IHT planning, get in contact with us below or email us at firstname.lastname@example.org or call us on +44 (0)345 505 3500.
Disclaimer: Not all areas of Estate Planning or tax planning are regulated by the Financial Conduct Authority. Tax treatment depends on individual circumstances. Both your circumstances and tax rules may be subject to change in the future.