Don’t pay the death duty - The most effective ways to cut your inheritance tax (pt1)
Benjamin Franklin once asserted: “In this world nothing can be said to be certain, except death and taxes”.
Whilst we agree with him on the death part – some taxes are less certain than others, and this is especially true when it comes to inheritance tax. In this first of a two-part blog, we explore some of the most effective steps you can take to reduce or even eliminate your inheritance tax obligations.
The inheritance tax rules
Before we start to look at ways to reduce inheritance tax, it’s important to have a clear understanding of the rules.
They are fairly complex, but here are the basics:
When you die, the government works out the value of your estate. This is the combined value of all your possessions, assets, property, investments and cash, minus the value of all your debts.
Your estate will then have to pay 40% tax on everything above the threshold of £325,000.
In the next couple of years, the government will also be introducing an extra family home allowance, (also known as the Main Residence Nil Band / MRNB), which will be introduced over a 4 year period:
2017/18 - £100,000 per person
2018/19 - £125,000 per person
2019/20 - £150,000 per person
2020/21 - £175,000 per person
This additional tax allowance can only be applied to the value of the main family home, and only if this property is left to children or grandchildren.
If your estate is valued at more than this, then it’s sensible to take steps to minimise your inheritance tax obligation.
Leaving money to charity
One of the easiest ways to reduce your inheritance tax is to leave at least 10% of your estate to charity. All money that you leave to charity is free from inheritance tax.
In addition to benefiting your chosen causes, this will also help to reduce the amount of inheritance tax you pay. Leaving at least 10% of your estate to charity will also reduce the amount of inheritance tax you need to pay on the rest of your estate, from 40%, down to 36%.
Gifting assets to your partner
If you’re married, one of the most effective ways of reducing inheritance tax is to gift items to your spouse.
Any items you give to your partner before your death won’t be included in the value of your estate, so won’t be liable for inheritance tax.
Making allowable gifts
Legally, you can give cash or gifts away up to the total value of £3000 each financial year (or £6000 if you haven’t given any away in the previous year), and these are exempt from tax.
You can also give additional cash gifts or assets when your children or relatives get married, and small gifts of up to £250 per person, per year, to as many people as you like.
This can be an effective way of reducing the value of your estate, to minimise your inheritance tax obligations.
Giving away your assets to friends or family
You can give away cash gifts or assets of any size to family members (excluding your spouse) or friend completely tax-free, taking them out of your estate, and eliminating the inheritance tax due on these gifts.
The only caveat here (and it’s a big one!) is that you need to survive for at least 7 years after gifting assets, or these gifts will be counted as part of your estate, and be subject to inheritance tax.
More inheritance tax busting tips
Read part two of this guide, filled with more ways to reduce and eliminate death duty.
In the meantime, click here to download our Ultimate Guide to Wills and Probate. Packed with everything you need to know about making a will and administering an estate, it’s the perfect introduction for anyone wanting to know more about wills.