Inheritance tax, also known as estate tax, is a levy imposed by the government on the estate of a deceased individual In the UK, inheritance tax is charged at a rate of 40% on estates valued above the current threshold of £325,000 With rising property prices and increasing wealth, more and more families are finding themselves liable for inheritance tax However, there are legitimate strategies that can be employed to minimize or even eliminate the tax burden on your estate Here are some top tips for avoiding inheritance tax in the UK.
1 Make Use of the Nil-Rate Band
The first step in avoiding inheritance tax is to make use of the nil-rate band This is the threshold below which no inheritance tax is due Currently set at £325,000, the nil-rate band can be transferred between married couples and civil partners, effectively doubling the threshold to £650,000 By structuring your estate in a way that distributes assets between spouses or civil partners, you can ensure that no inheritance tax is due on the first £650,000 of your combined estate.
2 Utilize the Residence Nil-Rate Band
In addition to the nil-rate band, the UK government introduced the residence nil-rate band in 2017 This additional allowance is applicable to estates that include a qualifying residential property being passed on to direct descendants, such as children or grandchildren The current residence nil-rate band is set at £175,000 per person and will increase to £175,000 in the tax year 2020/21 By making use of the residence nil-rate band, you can potentially shield £350,000 of your estate from inheritance tax.
3 Gift Assets During Your Lifetime
One of the most effective strategies for avoiding inheritance tax is to gift assets during your lifetime In the UK, gifts made more than seven years before death are exempt from inheritance tax By transferring assets to your heirs while you are still alive, you can reduce the size of your estate and potentially eliminate any inheritance tax liability altogether However, it is important to seek professional advice before making any significant gifts to ensure that you are aware of the potential tax consequences.
4 avoiding inheritance tax uk. Create a Trust
Another way to reduce your inheritance tax liability is to create a trust Trusts are legal arrangements that allow you to transfer assets to a trustee for the benefit of your chosen beneficiaries By placing assets in a trust, you can remove them from your estate and potentially reduce the amount of inheritance tax due There are various types of trusts available, each with its own set of rules and tax implications, so it is advisable to seek advice from a professional advisor before setting up a trust.
5 Invest in Business Relief
If you own a business or shares in a qualifying unquoted company, you may be able to take advantage of business relief to reduce your inheritance tax liability Business relief allows you to pass on qualifying business assets free of inheritance tax or at a reduced rate, depending on how long you have held the assets By investing in business relief, you can potentially shield a significant portion of your estate from inheritance tax.
6 Consider Life Insurance
Another strategy for avoiding inheritance tax is to take out a life insurance policy Life insurance can be used to provide a tax-free lump sum to cover any inheritance tax liability on your estate By using life insurance to cover the cost of inheritance tax, you can ensure that your beneficiaries receive the full value of your estate without having to sell off assets or take out loans to pay the tax bill.
In conclusion, inheritance tax can significantly reduce the value of your estate and leave your loved ones with a hefty tax bill However, by taking advantage of the various allowances and reliefs available, you can minimize or even eliminate the inheritance tax burden on your estate From making use of the nil-rate band and residence nil-rate band to gifting assets during your lifetime and investing in business relief, there are several strategies that can help you avoid inheritance tax in the UK It is important to seek professional advice to ensure that you are making the most of the available options and structuring your estate in a tax-efficient manner By planning ahead and being proactive, you can protect your assets and provide for your loved ones without the worry of a substantial inheritance tax bill looming over them