Don’t pay the death duty - The most effective ways to cut your inheritance tax (pt2)
With some careful planning, it’s possible to reduce the amount of inheritance tax your beneficiaries have to pay on the money and assets you leave behind.
Following on from part 1 of our inheritance tax busting guide, we show you a few more steps you can take to effectively reduce or eliminate inheritance tax obligations, exploring trusts, life insurance and wills.
Making a will
It might seem obvious, but more than half of UK adults still don’t have a will in place.
If you’re married, then making a will can be the single most effective way of reducing or even eliminating inheritance tax obligations. That’s because there is no inheritance tax payable between you and your partner – but if you die intestate (without a will), then your assets will be divided up according to strict intestacy guidelines.
This could lead to assets ending up with other relatives, which will be liable for inheritance tax.
Removing assets from your estate using trusts
Establishing trusts has long been an effective and tax-efficient way of protecting family wealth for future generations. Putting money, assets and property into a trust removes it from your estate, so they won’t be liable for inheritance tax them when you die.
There are lots of different trusts available, and the rules surrounding them can be complex. An experienced solicitor will be able to provide you with tailored advice on the kind of trust that’s best for you and your family, and on the best ways to structure the ownership of assets to shield them from inheritance tax.
Income over expenditure
One under-utilised method of reducing inheritance tax obligations is by taking advantage of the income over expenditure legislation.
In essence, this means that you make regular inheritance tax exempt gifts, or put some of your monthly income into certain kinds of savings accounts or insurance policies, and place them into trust.
There are some conditions to this – you can only make gifts out of your income, and the amount of the gift cannot impact on your usual standard of living. Your solicitor will be able to advise you as to whether this is the right solution for you.
Put a financial plan in place to cover the inheritance tax
If you’ve already taken all the steps possible to reduce inheritance tax, but are still left with an estate that exceeds the threshold, then you can always plan to pay off the tax on behalf of your beneficiaries.
Taking out a life assurance policy, with a cover amount that equals the expected amount of inheritance tax due can make a real difference to your beneficiaries. By eliminating the inheritance tax bill, you may be able to prevent beneficiaries from having to sell assets, like the family home.
If using life insurance policies to pay for death duty, it’s important that the pay out is written to trust. That way, it won’t count towards your estate, and therefore won’t be subject to inheritance tax.
Get clued up on wills and probate
Want to know more about any aspect of wills, probate or inheritance?