Career, Business & Money

Four Ways To Reduce Inheritance Tax

Inheritance tax is a tax on the wealth and assets of someone who has passed away. The estate is made up of everything remaining after all liabilities have been paid off. This can include property, money, investments, possessions and other entitlements. The estate planning process is complex and tricky to navigate on your own. It’s recommended you consult estate planning experts to guide you through the process and help minimise the inheritance tax your family will have to pay. Below we outline some of the best methods you and your family can utilise.

1. Put your assets into a trust

Trusts are separate legal entities that you can use to minimise tax liabilities. Putting your assets into one essentially transfers ownership so they don’t belong to you anymore. However, you can still influence how the money or assets are used and distributed, so it’s a sophisticated method of managing your estate. You should be aware that trusts are subject to taxes and fees in their own right, so work with a financial adviser to ensure it’s the best solution for you.

2. Give gifts while you’re still alive

An effective way to reduce your inheritance tax liability is to gift money, property, land or other assets to friends and family. There are no restrictions on the number of gifts you can make while you’re still alive. However, you do need to be aware of the 7-year rule.

This rule determines when a gift can be legally declared outside of your estate and therefore be tax-exempt. If you live for 7 years after making a gift, then it won’t be subject to inheritance tax once you die. The longer you live up until that point, the lower the inheritance tax rate it will be subject to after your death. Gifts can also be given to charitable causes. Leaving 10% of your estate to a charity can reduce your inheritance tax rate to 36% and potentially allow your beneficiaries to keep more money for themselves.

3. Leave everything to your partner

This should happen automatically for any joint assets, but it’s important to note that passing your entire estate over to your husband or wife is a legal way to avoid paying any inheritance tax immediately. Furthermore, married couples can pass their tax allowance to their surviving partner. So, your spouse’s estate should have a £650,000 tax allowance when they pass, rather than £325,000.

4. Use business relief

If you have any business assets or investments, some of these can be transferred to a beneficiary without being subject to inheritance tax. This method is typically used to pass business entities or interests to family, friends or business partners. You must have owned the business assets for at least 2 years in the last 5 before the date of death for them to qualify for business relief schemes.

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