Inheritance tax in the UK is not very difficult to understand. But planning your estate could be tricky.
Your beneficiaries will need to pay inheritance tax within the first 6 months of inheriting your estate.
When you plan your inheritance tax, there are a number of things you need to keep in mind. Then you’ll be able to build your estate plan effectively. We’ll get into them in this blog. Read on.
How to Plan Inheritance Tax in the UK
Basically, estate planning is done to reduce tax and give maximum benefit to your heirs.
What is the IHT Threshold?
Your heirs do not need to pay any inheritance tax if the estate you leave behind is below the IHT threshold.
- The inheritance tax threshold in 2022 is set at £325,000. This means that if your estate is below this amount at the time of death, your heirs do not have to pay any tax on this. You can raise the threshold in a number of ways.
- Usually, the inheritance tax comes out of the estate.
- You can use a combination of wills and trusts to keep your estate below the IHT threshold.
- You can gift up to £3,000 every year. This amount is not added when you are planning your estate.
- Raise the IHT threshold by leaving all of your estate to your spouse or civil partner.
- You can also raise the IHT threshold by increasing the residence nil band by £175,000 to £500,0000.
- All the gifts (apart from the £3,000 annual limit), given before 7 years from the date of death, are not added to your estate.
- The gifts given before 7 years to 3 years from the date of death are taxable by Taper Relief Slab.
- The gifts given in the last 3 years before death are taxable at 40% of the entire estate.
- Leaving some estate to charity removes it from the taxable estate.
The Taper Relief Slab –
| Years between Gift and Death | Rate of Tax on the Gift |
| 3 – 4 years | 32% |
| 4 – 5 years | 24% |
| 5 – 6 years | 16% |
| 6 – 7 years | 8% |
| 7 or more | 0% |
The Taper Relief Slab is used to calculate the inheritance tax payable after your death.
How do you Calculate IHT
IHT can be calculated at 40% of the estate left behind at the time of death. Further, estate planning can be done with the help of legal instruments called wills and trusts.
These wills and trusts have different properties and it is recommended to use a mix of these when planning an estate.
Legal Instruments for Estate Planning
The two main legal instruments for estate planning are wills and trusts.
Wills can only be executed after death, whereas trusts can be executed before death, as well.
Contact us to make your legal documents.
What are Wills?
Wills have information about your
- Assets
- Debt
- Beneficiaries
- Execution of will
- Guardians of children
- Power of attorney
Writing a will before your death will save your beneficiaries and heirs a lot of headaches. It will ensure that there is no feud regarding the distribution of your assets.
A will can only be executed after your death, however, you may amend it during your lifetime.
Every time you add a new asset or take on liability, you must modify your will.
Making a will could be a time-consuming process, but a reputed estate planner can help you with the amendment process.
We can take care of the amendment process for you. Call us at 0207 183 0136
What are Trusts?
Trusts are arrangements, legally conceptualized, to protect assets and direct them as the individual wishes.
There are two types of trusts –
Revocable trusts and irrevocable trusts.
Revocable trusts can be modified at any time, by the beneficiaries mentioned in the document.
However, irrevocable trusts can’t be modified without the consent of the individual, once they are in use.
Using Trusts and Wills
It is recommended to use a combination of wills and trusts so that you still have access to your assets in case of emergencies.
While wills can’t be executed during the individual’s lifetime, assets in trusts can be used while they are in the trust. This gives you more liquidity and flexibility.
Guardianship for children – Wills has the provision of taking care of minor children, whereas in trust you do not have that option.
Privacy – You have to declare your will to the state, hence, you lose privacy. But in the case of trusts, you don’t need to disclose the details to the state.
Managing disputes – Wills can be contested, especially if they aren’t current. Trusts, on the other hand, are current and are less likely to be contested.
Tax benefits – Wills do not have any tax benefits but certain kinds of trusts may have tax benefits.
Conclusion
Inheritance tax planning is not very difficult but needs to be done with great precision. You could miss out on very important aspects and end up paying more in taxes.
Enlist the help of a reputed inheritance tax planner and get the maximum benefits.