Death is not a subject many of us like to talk about, but the sad reality is that many grieving relatives are hit by a financial sting in the tail after their loved ones have gone: inheritance tax.
Inheritance tax (IHT), introduced to the UK in the mid 1980s, is a tax levied on property and money worth more than £325,000 left as a gift following your death. Anything above this threshold is taxed at 40%, or 36% if at least 10% of the estate is left to charity.
If your heirs then go on to sell any property you’ve left them for more than it was worth at the time of your death, they will also be liable for capital gains tax.
How do I avoid my family paying inheritance tax?
The best method of inheritance tax avoidance is to spend your money while you’re still alive; the more you leave, the greater financial burden it will be subject to.
Some items are even exempt from IHT, such as wedding gifts and agricultural property. You can see the full list at the Money Advice Service website
If you do want to leave some money behind for loved ones in the event of your death, the best way to avoid them being hit with a large IHT bill is to create a financial plan, calculating how much tax will potentially be due on our estate. This way, you can make your family aware of what they’re likely to owe.
Also, make sure you state your wishes in an up-to-date will, so that your heirs are not left squabbling over who should inherit what, as well as the amount of tax due on their payments.
Once you’ve’ carried out estate planning and you know whether it is going to be worth more than the £325,000 threshold, there are steps you can take to mitigate the tax due. For example, married couples and registered civil partners can make use of each other’s tax-free allowance.
You can also make financial gifts to your family while you are still alive.
Gifting is a great way of helping children should they need extra support financially; you can give away up to £3,000 per year. Equally, you can give money to charity, tax-free. However, be careful not give so much away that it curtails your current lifestyle.
If you think a large IHT bill is going to be unavoidable, you can take out a life insurance policy that will help your heirs to settle the sum owed.
Your inheritance tax check list
Know the up-to-date value of your estate – that will inform what course of action you take
Be aware of the £325,000 threshold – anything you leave above this figure will be subject to tax
Have a valid will – so your hard earned estate goes to exactly who you want it to go to
Consider gifting – this can help out relatives while you’re living and also reduce IHT in the event of your death
Think about giving to charity – save money on your tax and help a good cause
Put provisions in place – if you think your heirs will struggle to pay the posthumous tax bill for your estate
Never compromise yourself – although you don’t want to be passing down unnecessary tax, you also want to have enough funds to live a fulfilling life
If you’re unsure about how to plan your estate, contact our financial planning team today.
If you found this article useful, you may enjoy our recent blog “What Is Life Insurance and How Does It work?”
The Financial Conduct Authority does not regulate wills, taxation and trust advice.
Levels and bases of reliefs from taxation are subject to change.