When planning your estate, beware of inheritance tax. If your estate’s value eclipses a specific threshold (£325,000 at present), when you pass away, your estate will be required to pay a 40% inheritance tax on the remaining fixed assets. Combined, couples can currently benefit from an inheritance tax threshold of £650,000 at present, assuming that neither you nor your partner can utilise other exemptions.
We should note that in 2017, the UK government will phase in another tax free band for your main residence. This will initially be set at £100,000, rising to £175,000 in 2020, so you may be able to bequeath £500,000 before inheritance tax. You can further shield your assets via other exemptions, but many must be deployed seven years before your death, so it is wise to plan for inheritance tax now. Turner Little considers ways to mitigate the effect of inheritance tax on your estate.
Write a will
It is advisable to write a will now, so you can determine who will inherit the assets held in your estate. Without a will, you will die intestate, meaning that you may not be able to capitalise on an inheritance tax exemption which can be deployed when you bequeath your estate to your spouse or civil partner. Other relatives, for instance, could inherit some of your estate, triggering an inheritance tax liability.
Give lifetime gifts
The government does not apply inheritance tax to any gifts you make to an individual or bare trust seven years before you die. Therefore these gifts will not count towards your estate, reducing its value for inheritance tax purposes. If you pass away within seven years of making this gift, you will only receive this allowance if your gift’s value eclipses the yearly gift allowance. If you make a ‘Gift with Reservation of Benefit’ i.e. you pass your home onto your children while still living but attach certain conditions, or continue to benefit from it, you need to be very careful to avoid inheritance tax.
Donate to charity
You can lessen your estate’s inheritance tax bill by bequeathing a portion of your estate to charity. We should note that if you leave 10% of the net value of your estate to charity in your will, another reason it is crucial that you write one now, your estate will be allowed to pay inheritance tax at a reduced 36% rate, instead of 40%. The net value of your estate refers to its value sans debts and gifts.
Utilise trusts
Trusts can serve as valuable estate planning tools. You (the donor) can create a trust, allowing you to appoint ‘trustees’ to manage assets on behalf of ‘beneficiaries,’ via terms established in a ‘trust deed.’ With trusts, you can control who benefits from your assets, and under what circumstances, sometimes for years after your death, while with a direct gift, you lose control once you have given it away.
By passing assets onto loved ones via trusts you can reduce your inheritance tax bill, as said assets do not count towards the value of your estate. The types of trust you use depend on your circumstances and you can even combine multiple trusts to plan for inheritance tax more effectively. Trust law can prove complex, so it is wise to enlist expert aid when using these legal instruments for inheritance tax purposes. As experts in this area, Turner Little can advise you on setting up trusts.
Turner Little
Turner Little was founded in 1998 and it has since become a well-established UK based professional Company Registration Agent, Registered Bank Intermediaries and Business Consultants, as well as Trust provider. You can receive our monthly newsletter by signing up using the form below.
