None of us like to think about our own mortality. However, the simple message about sharing your inheritance when you can, makes a huge difference to the loved ones that you leave behind.
What are the rules surrounding inheritance?
In the UK, beneficiaries are currently not subjected to inheritance tax if the value of the estate left to them is less than £325,000. However, this is the sum total of all assets – including property – so most people end up leaving an estate worth more than this amount.
As a result, beneficiaries could be liable to pay inheritance tax of 40% on a large chunk of the estate they have been left.
How can I reduce my inheritance tax?
The good news is that, when doing your estate planning, there are a number of ways you can bring down the level of inheritance tax your loved ones will be expected to pay – but you need to put many of the opportunities into action while you are still fit and healthy.
For example, you are entitled to a personal allowance, which means you can gift up to £3,000 to someone tax-free each year. This is a great way to share your wealth with your children and reduce the tax burden on them. Plus, if you do not use up your £3,000 allowance one year, you are allowed to carry it over to the following year.
You can make lifetime gifts of more substantial sums towards a specific purpose. For example, some parents like to give their children a deposit for their first home. The only thing to be aware of here is that, if you pass away within seven years of making this gift, the beneficiary will still be liable to pay inheritance tax.
If you have young grandchildren, you might want to consider setting up a trust for them, as the money that is put into that trust will be potentially tax-free. However, there are complex rules surrounding trusts, so it’s always best to consult the services of a financial expert.
How can I use my pension pot to reduce inheritance tax?
When doing your estate planning, another good way to minimise the potential inheritance tax burden on your family is to spend your savings before your pension, when you reach retirement age.
This is because new legislation brought in earlier in 2016 allows the full value of your pension to be passed on to your beneficiary tax-free in the event of your death, whereas inheritance tax is liable on savings funds such as ISAs. There are some caveats to this based on what age you live to, however the general rule of thumb is to leave your pension pot until last in the spending order.
How does charitable giving impact my inheritance tax bill?
One final thing to bear in mind is that it’s not just how you give money to your children that impacts your inheritance tax bill. One effective way to reduce inheritance tax is to leave at least 10% of your estate to your charity. As a result, the tax burden on your entire estate will be lowered from 40% to 36%.
The saving is minimal, but if you were planning on leaving some money to charity anyway, fine tuning the total could have a big benefit for the other recipients of your estate.
If you’re unsure about how to gift for your estate or if your children need help to set up ISAs and a pension, contact our financial planning team today.
Check out our Inheritance Checklist For Women by clicking here.
The Financial Conduct Authority does not regulate taxation and trust advice.
Levels and bases of reliefs from taxation are subject to change.