You may be at a stage in your life where the future of your family, and making sure that they are well provided for when you are gone, is a priority. In these situations, inheritance tax (IHT) is a factor you will need to consider because it can impose significant costs on your estate and eat in to the assets that would be passed on to your relatives. It is worth looking at the options open to you for inheritance tax avoidance to minimise or remove the impact of IHT and to ensure that you can be confident your loved ones will be taken care of.
IHT is only levied on estates with a worth of over £312,000, so you do not need to worry about inheritance tax avoidance if your combined assets (including property) is worth less than this. More and more UK residents are becoming liable for paying IHT, however, as house prices rise, so it is worth keeping an eye on the value of your property. Any worth in excess of £312,000 will be taxed at a rate of 40%. Furthermore, gifts made in the past seven years will also be subject to IHT if they are not exempt, as detailed below.
Inheritance tax avoidance can be achieved through the following means:
- Making use of exemptions, such as for up to £3,000 of gifts each year, up to £250 of gifts to each individual each year, and wedding or civil partnership gifts up to a certain sum defined by your relationship to the new couple.
- Spousal exemption means that a UK-domiciled spouse or civil partner can receive the whole estate with no IHT levied.
- Political party donations and charity donations are exempt from IHT.
- Certain types of trusts and life assurance can allow for IHT-exempt wealth to be passed on to your chosen beneficiaries after you pass away.
Other gifts are subject to IHT over the course of seven years after they are given, but the amount of tax that they are liable for reduces each year, and after seven years these potentially exempt transfers (PETs) become completely exempt. Some gifts, classified as gifts with reservation, are still subject to IHT – these are classified as those gifts for which the donor is still in a position to benefit from, such as giving a house to children but continuing to live there without paying rent.