The United States isn’t the only place in the world where people have to worry about how they will pass on their life-long fortune to their heirs. The English have similar problems and rules written within their tax codes that can complicate how an inheritance is handled after a loved one passes away.
The interesting thing that a lot of people don’t really understand: It doesn’t matter whether a person has paid the basic rate of tax for a lifetime. They will become a higher-rate taxpayer posthumously if their estate is worth more than £325,000 upon death.
While that may sound like a high threshold, it means thousands of homeowners in the south of England could be hit by IHT solely because of their ownership of property.
Fortunately there are several ways and tips for avoiding inheritance tax which will allow people to leave more to their loved ones after they’re gone.
1. The Giving of Gifts
It is possible to give gifts of assets and cash to your friends and family before your death in order to avoid IHT. There is a £3,000 limit before tax is applied to gifts, but unused allowances can be carried over to the next year. You can give away more than your allowance and avoid tax, but you must live for a further seven years after the event. Caution should be taken when giving away property, however, as HMRC may apply ‘gift without reservation’ rules – meaning inheritance tax will still be applied if you continue to live in the property.
2. Claim Your Spouse’s IHT Allowance
If you are married or in a civil partnership, you can double your IHT allowance by claiming any unused allowance after your partner’s passing. So if your partner leaves you everything in a will, you can apply their unused allowance to your own assets – providing up to £650,000 of tax-free inheritance for those named in your own will.
3. Take Out Insurance Against Inheritance Tax
If you are leaving substantially more than your IHT-exempt allowance, you may have concerns that your heirs’ inheritance will be eaten up by tax. However, you can take out a whole life insurance policy, which will pay out to named beneficiaries upon your death – covering the amount lost to IHT. You should consult a financial advisor before doing this, as insurance policies that aren’t ‘written in trust’ will simply be swallowed up as part of your estate.
4. Make a Donation to Charity
Donating just the right amount to charity will reduce the size of your taxable assets, which could mean your loved ones end up with a larger proportion of your estate. Moreover, donating to charity can also drastically reduce the rate of inheritance tax your heirs will have to pay. If you donate at least 10 percent of your total assets to charity, the rate of IHT applied to your final estate will be reduced to 36 percent.
5. Invest Your Capital in a VCT
A venture capital trust (VCT) is usually a publicly listed company that invests money into unlisted and start-up companies. The government is keen on VCT’s, as they are plugging a large investment hole left by mainstream banks after the economic crash of 2008. By investing your capital in a VCT, your shares can be bequeathed without liability for inheritance tax – provided you have owned them for at least two years before the time of your death.
It is only natural to want your loved ones to receive the assets you have worked a lifetime to obtain. However, without careful and considered inheritance tax planning, your heirs could lose up to 40 percent of their legacy. By seeking advice from expert financial advisors and putting your affairs in order today, you can enjoy life with the peace of mind in knowing that your family will be well provided for when you’re gone.
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