Inheritance tax (IHT) is a tax on the estate of someone who has died and is payable on the value of their assets above a certain threshold In the UK, the current threshold is £325,000, known as the nil-rate band Anything above this threshold is subject to a tax rate of 40% This can put a significant dent in the assets that are passed on to loved ones, so it’s no surprise that many people are looking for ways to legally reduce or avoid paying inheritance tax.
There are various strategies that can be employed to reduce an individual’s exposure to inheritance tax, some of which are more complex and require careful planning It’s worth noting that attempting to evade inheritance tax by illegal means is a criminal offense, so it’s important to seek advice from a professional tax advisor or financial planner to ensure that you are compliant with the law.
One of the most common ways to avoid inheritance tax is by making gifts Gifts made more than seven years before the donor’s death are exempt from inheritance tax This means that by giving away assets during your lifetime, you can reduce the value of your estate and potentially reduce the amount of tax that will be payable when you die However, there are certain rules around gifting that need to be followed to ensure that they are not considered as “gifts with reservation of benefit”.
Another popular strategy for avoiding inheritance tax is by taking out a life insurance policy written in trust The proceeds from a life insurance policy are not considered as part of the deceased’s estate if the policy is written in trust This means that the payout can be used to cover any inheritance tax liability, ensuring that the beneficiaries receive the full value of the estate It’s worth noting that the trust must be set up correctly to ensure that it is effective in reducing inheritance tax.
Utilizing the various exemptions and reliefs available under UK tax law is another way to reduce an individual’s liability to inheritance tax inheritance tax avoidance uk. For example, the residence nil-rate band allows individuals to pass on an additional £175,000 of property to direct descendants tax-free This threshold is set to increase to £175,250 in April 2022 By taking advantage of this relief and others, it’s possible to significantly reduce the amount of tax that will be payable on your estate.
Investing in business property relief (BPR) qualifying assets is another way to avoid inheritance tax If an individual holds more than 50% of a qualifying trading business or shares in an unquoted company, these assets are eligible for 100% relief from inheritance tax This means that they can be passed on to beneficiaries tax-free However, it’s important to seek advice from a tax professional as there are strict criteria that need to be met to qualify for BPR.
In addition to the strategies mentioned above, there are also various trusts that can be used to reduce an individual’s liability to inheritance tax Trusts allow assets to be held for the benefit of others while keeping them out of the estate of the settlor Different types of trusts have different tax implications, so it’s important to seek advice to ensure that the trust is set up correctly to achieve the desired tax benefits.
In conclusion, inheritance tax avoidance in the UK is a complex area of tax law, and there are various strategies that can be employed to legally reduce an individual’s exposure to this tax From making gifts to utilizing exemptions and reliefs, there are plenty of options available for those looking to pass on their assets tax-efficiently However, it’s important to seek advice from a professional tax advisor or financial planner to ensure that you are compliant with the law and that the strategies you are employing are effective in reducing your inheritance tax liability.