Death is an unfortunate certainty and one for which we must all eventually make preparations. But many of us are less preoccupied with matters of our estate than we perhaps should be – especially when it comes to matters of tax.
You will rightfully want as much of your estate to reach your family as possible before hefty 40% inheritance tax levies decimate the value of what you leave behind. Thankfully, there are methods of reducing this obligation and ensuring your family get what they deserve.
One key principle behind reducing your inheritance tax obligation is the reduction of the value of your inheritance. This can be achieved in several ways, but one of the most common can be found in the giving of gifts.
Each tax year, you have an annual exemption on inheritance tax for gifts of up to £3000. This allowance can roll over if unused, but only once – granting a £6000 tax exemption on gifts. There is also a rule that states any gifts given more than seven years before death are exempt from tax. This means that managing and divesting your estate early could near-completely remove your tax obligations.
Leave Your Entire Estate to a Partner
There are numerous ways in which you can reduce your tax obligations on your estate, making estate planning a useful way to utilise guidance and expertise in correctly structuring your will. One of the simplest suggestions you will receive in this regard is to leave your entire estate to a partner or spouse.
There is no inheritance obligation to leave your estate to a partner, no matter the size of the estate. Further to that, your partner will also inherit your unused inheritance tax allowance – enabling the partner to pass on those inheritance tax savings to their family in the event of their passage.
There is also a relatively new provision concerning property in particular, that increases your inheritance tax allowance by £500,000 if you leave your home to your children or grandchildren. The caveat here is that your estate must be worth less than £2 million for eligibility.
Earlier, the concept of reducing your estate’s accessible value was introduced. There is another common manner in which this is employed by estate planners, that enables you to diversify your estate’s recipients without increasing your tax burden in the process: opening trusts.
A trust is a legally defined agreement wherein part of your estate – whether money or assets – is held by a third party, and conditions are placed on its usage. For example, a trust may be used to leave money to a young beneficiary, protected from use until they turn 18. When money or assets are divested to a trust, their value no longer counts to the value of your estate – reducing your overall inheritance tax spend.
Give to Charity
Lastly, any charitable donations left in your will are treated as tax-exempt, reducing the taxable value of your estate. This is particularly useful where your estate may be a hair above the inheritance tax threshold; a small donation can completely remove your estate from its tax burden.