If you want to avoid paying a large Inheritance Tax bill, then it is crucial that you plan what happens to your estate when you pass away. Our experts can put your mind at ease and help advise you on the best steps to support your family in the event of your death.
If you would like to talk through your personal situation, one of our advisors at Thornton and Baines will be able to guide you in the right direction.
What is Inheritance Tax?
Inheritance Tax is a tax paid on the value of your estate at the time of your death. Everyone has what is known as a ‘nil-rate band’ of £325,000. This means that anything below this value is exempt from inheritance tax, and everything above it is subject to a 40% tax.
If you are married or in a civil partnership, you have a combined nil-rate band of £650,000. Moreover, in April 2017, an additional main residence nil-band was implemented; for the tax year 2021/22 this is £175,000. To qualify for this residence nil-band, the individual’s main residence must be inherited by a direct lineal descendant. This could be a child (including a stepchild, adopted child or foster child) of the deceased, or their lineal descendants (for example, a grandchild).
Things you need to consider when planning
In order to conserve your wealth, it is important to plan ahead. Simple ways to do this include spending and making personal gifts during your lifetime. However, if your estate is complex, then it will be in your best interests to seek professional financial advice.
Many people delay planning for any Inheritance Tax until it is too late. We have identified some useful tips that you can implement now which will reduce your IHT bill later down the line.
Simply put, spending more money while you’re alive is a very effective way of freezing/lowering the value of your taxable estate. However, it is important that you do not overspend, so be sure to leave enough to sufficiently take care of your needs.
Making personal gifts:
Gifts made to friends or family during your lifetime may be exempt from Inheritance Tax. However, you must live for seven years after making the gift for it to be completely outside of your estate.
These gifts are often known as Potentially Exempt Transfers, or PETs. If you have any queries regarding your personal estate, one of our advisors will be happy to assist you. Find us at: https://inheritance-tax.co.uk/area/inheritance-tax/
Making complex planning solutions:
Another way to reduce your inheritance tax bill is to make a gift into a Trust. This type of planning can occur during your lifetime or after your death.
Whilst you are still giving away an asset, you are still able, in most cases, to maintain control over how this trust asset is managed and who can benefit from the Trust as a Trustee. However, it is important to note that you cannot personally benefit from the Trust if it is to be effective for inheritance tax.