The day has come, you are finally retired and awaiting your first state pension payment (which has been already pushed back), ready to see what your golden years have in store. Of course there is another thought that might also cross your mind and that might be: ’Will my children and grand children fully benefit from my hard earned estate?’
With the Inheritance Tax thresholds frozen until 2026 and with ever increasing property prices you may start to wonder if its worth doing something before the taxman becomes the main beneficiary of your estate.
If you are thinking how inheritance tax is calculated, the inheritance tax calculation (UK) takes in to account your global assets as long as you are deemed domiciled in the UK. (Living in the UK for 15 out of the last 20 years). This means your property, savings and investments, personal chattels and even potential gifts made in the last 7 years can full part of your net estate. There are further rules how you get an reduction through taper relief where the examples can be found here Trusted Estate and Inheritance Tax Consultants in London, UK | Inheritance-tax.co.uk
The current Nil Rate Band (NRB) and Residential Nil Rate Band (RNRB) thresholds are £325,000 and £175,000 respectively. Meaning, a married couple or civil partnership have a combined allowance of £1,000,000 (£500,000 each). There are a few catches however whereby your estate may not be eligible for the full RNRB if one of the following apply:
- Your property is not being left to direct decedents. This means Children/grandchildren
- You do not own a property
- If your estate exceeds the value of £2.7million if you are married
- If your estate exceeds the value of £2.35million if you are single
- If your property does not exceed the value of £300,000
So what do you do about it? Can something be done? The quick answer is yes.
Below, are 5 ways to pay less IHT:
1. Spend it! –
1. Spend it! –I’m sure the majority of the readers would be told the same by their children however this might not natural to you. To help you with this just think when ever you go shopping and you double think a purchase that feels a bit extravagant just imagine that there’s a 40% or 60% OFF sales sticker attached to it.
2. Utilise government allowances –
every year each person has an annual allowance of £3,000 that they can gift without having to survive the ‘7 year rule’ (don’t worry I’ll go more in to this in a moment). Further to this you can back track one tax year if you haven’t already gifted. Therefore, a couple can gift £12,000 and immediately save £4,800 in tax!
Other allowances are the small gift allowances of gifting £250 to unlimited individuals per tax year and gifting £5,000 for the marriage of your child.(£2,500 for grandchildren and £1,000 for anyone else)
3. Gifting to Charity –
All gifts to a UK registered charity are free of any tax as well as benefiting from a reduction of the percentage payable. If you were to leave 10% of your estate to charity, the tax is reduced from 40% to 36%. Further to this there may be no tax to pay at all if that gift falls under your NRB allowance.
4. Gifting –
Mary and John have a holiday home in Devon that you spend 3 months of the year there. They wish to transfer this property to their son Peter in the hopes of surviving the 7 years. This however would only work if they paid him rent for that period as they would still be benefiting from their house even though it is technically in their name.
Further to this when gifting property you may need to be aware of how to avoid paying capital gains tax on inherited property too.
5. Trust planning –
You may of come across this term in the past maybe through a when drafting your Will or overhearing a chat at golf club. Trusts can be an extremely effective tool for you to leave money outside of your estate for IHT purposes whilst maintaining some sort of benefit too.
To see how you can find out more ways to find the right solutions through regulated guidance visit: https://inheritance-tax.co.uk/contact-us/.
If you have found yourself here dealing with probate a useful inheritance tax calculator & inheritance tax interest calculator can be found here:
https://www.gov.uk/guidance/hmrc-tools-and-calculators#inheritance-tax