Inheritance Tax (IHT) is a tax applied to the estate of someone who has passed away.
While the rules can be complex, there are strategies to reduce or eliminate this tax legally.
Here’s a simplified guide.
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Key Details:
1. Tax-Free Threshold: Estates worth up to £325,000 are exempt from IHT (the "nil-rate band"). Married couples or civil partners can combine unused allowances, doubling it to £650,000.
2. Additional Allowances:
o If you leave your home to direct descendants (children or grandchildren), the Residence Nil-Rate Band (RNRB) adds £175,000 per person, increasing the tax-free threshold to £500,000 (or £1 million for couples).
3. Tax Rate:
o Anything above the threshold is taxed at 40%, though charitable donations reduce this to 36%.
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How to Reduce IHT:
• Make Lifetime Gifts: Gifts made 7 years or more before death are exempt from IHT. This strategy is particularly effective for large assets or financial gifts.
• Establish a Trust: Trusts can help transfer wealth while retaining control over how it is used. Assets placed in a trust often fall outside the estate for IHT purposes after seven years.
• Invest in Business Property Relief (BPR) Qualifying Assets: Certain investments, like shares in unlisted companies, qualify for 100% relief after being held for two years, making them exempt from IHT.
• Charitable Donations: Donations to registered charities are exempt from IHT and reduce the overall tax rate if at least 10% of the estate is left to charity.
• Take Out Life Insurance: A life insurance policy in trust can cover the IHT liability, ensuring that beneficiaries don’t need to sell assets to pay the tax.
• Use Annual Exemptions:
o Gift up to £3,000 tax-free per year.
o Give small gifts up to £250 to as many people as you like.
o Wedding or civil ceremony gifts: Up to £5,000 for children, £2,500 for grandchildren.
• Leverage Agricultural and Business Relief: Owners of farms or businesses can often claim up to 100% relief on qualifying assets.
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Summary:
• IHT applies at 40% to estates over £325,000, but exemptions and allowances exist.
• Married couples can combine thresholds for up to £1 million with the RNRB.
• Reduce IHT by:
o Making lifetime gifts and using the 7-year rule.
o Setting up trusts to manage wealth and control taxation.
o Investing in assets eligible for Business Property Relief.
o Donating to charities to lower the taxable estate or reduce the tax rate to 36%.
o Using life insurance in trust to cover liabilities.
o Taking advantage of annual gift exemptions.
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By combining these strategies, you can significantly reduce IHT, preserving more of your estate for loved ones. Planning early is essential, so consult our experts today at www.virtuswealth.co.uk
Inheritance Tax UK
How Inheritance Tax Works
Reducing Inheritance Tax
Inheritance Tax Threshold UK
Inheritance Tax Exemptions
UK Inheritance Tax Rates
Inheritance Tax Planning
Gifting to Reduce Inheritance Tax
Inheritance Tax Strategies
Inheritance Tax Reliefs
Inheritance Tax for Married Couples
Reducing Estate Taxes
Inheritance Tax Gifts
Trusts for Inheritance Tax
Business Property Relief
How to Avoid Inheritance Tax
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