Inheritance Tax (IHT) has hit new heights in 2017, with the last figure showing it is now up to £5 billion.
New rules extending the IHT-free allowance have, however, come into play, and mean that some couples may be able to pass on £1 million tax-free by 2020. Nevertheless, IHT is expected to rise even more over the next 5 years, potentially reaching £6.2 billion by 2022.
With this in mind, there are a few ways to reduce inheritance tax for your loved ones and leave behind more of what they deserve. Here’s what you should know about inheritance tax planning.
Make a Will
Making a Will is an excellent place to start, as it’s a simple way in which you can plan where your estate will go and reducing inheritance tax along the way.
Not having a will means that your estate would be processed according to the rules of intestacy upon your death. This means that it’s possible that more of your estate ends up taxed.
In order to give away gifts without incurring any inheritance tax on them, it’s important to consider the size of these allowances. Every year, you have a tax-free gift allowance of £3,000. This is also known as the annual exemption and can be carried on to the next year (and this year only) if you don’t use the full allowance the previous year.
However, there are more options that you can consider for reducing inheritance tax, for example making gifts for a wedding or civil ceremony to a family member, or making gifts to charity.
Setting up a Trust
Trusts can be an effective way of reducing inheritance tax, as cash, property or investments would no longer belong to you once they are part of a trust.
Trusts can be effective in reducing the value of your estate, meaning IHT can also be reduced as a result. This is because when you use a trust, provided certain conditions are met, the assets are effectively no longer yours.
When you set up a trust, you decide the rules on how it will be managed. As well as this, trusts also have their advantages in that they mean you don’t have to hand over valuable investments or property while the beneficiary is too young.
Some trusts you are able to write into your will, and some trusts you can set up immediately. It’s important to ensure you set up the right kind of trust, in order to make sure you are reducing inheritance tax effectively.
However, there are complex regulations and laws regarding this, meaning that it’s important to seek advice to ensure you make the right decisions for your estate.
The earlier, the better
There are multiple ways to reduce inheritance tax through making use of gift allowances. You can give away gifts free of inheritance tax providing you live for at least 7 years after you give them. Alternatively, you may wish to downsize to a cheaper property, giving money to your children now instead of later. This means that your children will still benefit from the residence nil-rate band that applied to your previous home.
If you’re interested in finding out more about how to reduce inheritance tax and need advice, talk to our financial advice team. Please call on 01926 492406 or email us at firstname.lastname@example.org to make an appointment.