Benjamin Franklin was famous for saying that there are only two things in life: death and taxes. Unfortunately, the inheritance tax (IHT) covers both. The rules continue to be updated but, in simple terms, when you die, the net worth of your estate will be subject to a flat rate of 40% IHT on anything above the nil threshold of £ 325,000 .
With rising real estate prices, an increasing number of families are affected by the IHT, which can reach hundreds of thousands of pounds. Last year, the revenues of the IHT have exceeded the £ 3.1 billion, and yet it is perfectly possible to avoid huge parts of the IHT, to pay nothing at all. Nothing foolish about it – all it takes is a bit of smart financial planning.
Here are 8 tips to help you minimize your responsibility for health and safety.
1. Make a Will
Writing a will should be the cornerstone of your estate planning. If there is no will, the intestacy rules will apply, meaning that the law actually decides what happens to your estate. For those who are not married and who do not have children, the estate would pass to their parents, which could increase their exposure to the IHT. Making a will not only guarantees that your assets will be passed on to your chosen beneficiaries, but it will also give you the opportunity to make provisions in the most tax-efficient way.
2. Purchase life insurance
One of the easiest ways to provide funds to pay the IHT is to take out an entire life insurance policy for an amount equal to that of the tax to be paid . Make sure the policy is in trust for your beneficiaries, so that the death benefit is paid immediately and without having to be probated.
3. Use your annual grant of exempt gift
You can offer up to £ 3,000 a year tax-free, as well as small gifts up to £ 250 per person. In addition, there are exemptions for wedding gifts, donations of income, donations to charities or political parties and gifts to help take care of another person. There is no IHT to pay on gifts between spouses as long as their permanent resident in the UK. For all other gifts, the seven-year rule applies to "potentially exempt transfers".
4. Making use of trusts
Assets placed in a "pure" trust, where the beneficiaries are absolutely entitled to the assets of the trust and the income generated by those assets, are considered to be a potentially exempt transfer. Discretionary trusts are limited to the zero-band rate, unless you are happy to incur a 20% immediate life transfer tax, plus a possible 20% if the person making the donation dies within 7 years .
5. Consider the lightening of corporate rights
If you invest in property that attracts commercial property, such as those listed on the AIM, they will be exempt from the IHT after only 2 years. Due to the volatility of these stocks, prudent financial planning advice is highly recommended. If you are a business owner (sole proprietorship, partnership or unlisted trading company), you should know if your business is eligible for 100% corporate duty exemption.
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6. Investigate options for the release of equity
Rather than giving up your capital, you could use a fairness release plan to free up some of the equity in your property and give it to others in addition to standard allowances (under reservation of the seven-year rule). In this way, your IHT liability will be reduced while funds can be made available to your loved ones during your lifetime. The release of shares is a complex subject and must be carefully studied with the help of a stock release specialist.
7. Consider buying farmland
Farmland qualifies for the relief of agricultural property up to 100% after 2 years of ownership. However, to take advantage of the relief, you must make sure that the land is in accordance with the law, which means that you will have to actively work the land as a business venture.
8. Make charitable donations
Charitable donations are exempt from the IHT. But did you know that if you donate 10% of your net worth to a charity, the rest of your estate will only be charged at 36% instead of the usual 40%? It is worth considering this allowance if you are considering making charitable donations in your will.