Inheritance tax, also known as the “death tax,” is a tax that is levied on the estate of a deceased person before it can be passed on to their heirs In the UK, the current inheritance tax rate is 40% on estates valued over £325,000 (£650,000 for married couples).
Many people understandably want to minimize the impact of inheritance tax on their estate so that they can pass on as much as possible to their loved ones Fortunately, there are legal ways to reduce or even avoid inheritance tax in the UK Here are six strategies that you can use to avoid or minimize the impact of inheritance tax:
1 Make Use of the Nil-Rate Band
The first step in minimizing inheritance tax is to make use of the nil-rate band, which is currently £325,000 per person This means that individuals can pass on assets worth up to £325,000 tax-free Married couples benefit from double this allowance, as any unused nil-rate band from the first spouse can be transferred to the surviving spouse, potentially giving them a combined inheritance tax threshold of £650,000.
2 Take Advantage of the Residence Nil-Rate Band
In addition to the standard nil-rate band, homeowners can benefit from the residence nil-rate band (RNRB) when passing on their main residence to direct descendants, such as children or grandchildren The RNRB is currently £175,000 per person and is set to increase to £175,000 by 2020/21 When combined with the standard nil-rate band, this means that married couples could have a total inheritance tax threshold of up to £1 million.
3 Give Gifts
One way to reduce the value of your estate and potentially avoid inheritance tax is to give gifts to your loved ones during your lifetime You can give away up to £3,000 worth of gifts each tax year, as well as additional gifts of up to £250 per person inheritance tax avoidance uk. Additionally, gifts made seven years before your death are exempt from inheritance tax.
4 Set Up a Trust
Setting up a trust can be an effective way to avoid inheritance tax, as the assets held in the trust are not considered part of your estate for tax purposes There are various types of trusts available, each with their own rules and tax implications, so it’s important to seek advice from a financial advisor or solicitor before setting up a trust.
5 Invest in Business Relief
Investing in businesses or shares that qualify for business relief can be an effective way to reduce the value of your estate for inheritance tax purposes Business Relief offers relief from inheritance tax on certain types of business assets, including shares in qualifying unlisted companies and land, buildings, or machinery used in a business.
6 Plan Ahead
One of the most important strategies for avoiding inheritance tax is to plan ahead By taking the time to review your estate and make the necessary arrangements, you can ensure that your assets are passed on to your loved ones tax efficiently This may involve updating your will, making gifts during your lifetime, or investing in assets that qualify for tax relief.
In conclusion, while inheritance tax can be a significant burden for your loved ones, there are ways to minimize or even avoid it altogether By making use of the various tax reliefs and exemptions available, as well as seeking advice from a financial advisor or solicitor, you can ensure that your estate is passed on to your heirs tax-efficiently Remember, it’s never too early to start planning for your future and protecting your legacy.