With house prices soaring, more estates are now being subject to inheritance tax as the average inheritance tax bill reaches £214K.
In the 2020-21 tax year, inheritance tax was charged on 27,000 estates. An increase of 4,000 compared to the previous year. This raised a record £5.76bn in taxes and it is predicted that this figure is set to rise to £8bn by 2028. Estates valued over £1m were liable for 81% of tax paid. Despite inheritance tax being charged at 40% on the excess, the average rate paid was 13% due to tax free allowances, reliefs and exemptions.
Importance of inheritance tax planning
With values of assets increasing due to inflation the importance of careful inheritance tax planning cannot be overstated. Inheritance tax planning can help you reduce or even remove the amount of tax your loved ones will have to pay when they inherit your estate.
Below are some of the measures that you can take to reduce your inheritance tax liability:
Use lifetime exemptions (Gifts)
One of the most simple and effective ways you can reduce your inheritance tax is by making use of lifetime exemptions. These include the Annual Gift Allowance which allows you to gift up to £3,000 per fiscal year in cash or assets. There is also the small gifts exemption where you can gift up to £250 to as many individuals as you like except for those who have already received a gift as part of the £3,000 annual exemption. Finally, you can also make a wedding gift. The amount you can gift tax-free depends on their relation to you.
- Child: £5,000 or less
- Grandchild or great-grandchild: £2,500 or less
- Other relative or friend: £1,000
Spend your cash!
There is no inheritance tax charge on normal expenditure! This will reduce the value of your estate and result in less inheritance tax being paid. Surplus income building up just makes things worse.
Setup a trust
Setting up a trust can be an effective way of reducing your inheritance tax bill. In simple terms, a trust is a legal agreement where you give cash, property or investment(s) to someone else (trustee) to look after for the benefit of the third person (beneficiary). One of the most common examples of this is when giving cash, property or investment to your child (trustee) to look after for your grandchild or grandchildren (beneficiary).
Whilst trusts can be a great way of reducing your inheritance tax it is important to be aware that when you put cash, property or an investment into a trust it no longer belongs to you, it belongs to the trust. This is the reason why it will fall outside of your estate for inheritance tax purposes.
Rules regarding trusts can be complex so it is recommended to seek professional financial advice when setting up a trust.
Donate to charity
Donating money to UK registered charities over your lifetime will always be free from inheritance tax. Furthermore, if you leave 10% or more of your estate to a registered charity the inheritance tax rate for the rest of your estate will also fall by 10% to 36%.
Leave your estate to your spouse
If you are married or in a civil partnership your partners estate will be left entirely to you with no inheritance tax. However, if you have a partner but are not married or in a civil partnership there is no automatic right for your partner to inherit your estate tax-free.
To conclude, with the average inheritance tax bill increasing to £214,000 it has never been more important to consider inheritance tax planning. There are many inheritance tax planning opportunities available to reduce the amount of inheritance tax your loved ones will pay on your estate and not all of these involve you losing access to your money. Gifting, spending your cash, setting up a trust, donating to charity and leaving your estate to your spouse are just the starting point.
How can we help?
At Hawsons Wealth Management our financial advisers can put an inheritance tax plan in place for you and help you execute it to ensure that your loved ones get the most from your estate, rather than HMRC.
Director of Hawsons Wealth Management Limited, Sheffield
Free initial meeting
HMRC has published new advisory fuel rates for company car users which take effect from 1 December 2023. Advisory fuel rates have increased by 1p for petrol cars with an engine size of 1400cc or less and over 2000 cc. LPG fuel rates have increased by 1p in for engines...
As a self-employed business owner, you may find it hard to keep on top of tracking accounting records, taxes and expense claims when submitting your self-assessment tax return. Hiring an accountant could benefit you with the following points. There are many different...
Autumn Statement 2023 On 22 November 2023, Jeremy Hunt delivered the ‘Autumn Statement for Growth’. Against an improving economic backdrop, the Chancellor is keen to stimulate economic growth and highlighted 110 measures for businesses. In addition, there were...