You may want your children to get your estate when you die, but having to pay inheritance tax (IHT) may reduce the amount that ends up in their pockets. In inheritance tax, a total of £5.32 billion was paid to HMRC from 2020 to 2021, just short of the record £5.36 billion paid from 2018 to 2019.

In this article, you will learn about ways you can prevent the taxman from seizing your assets before your children do and how you can begin proper inheritance tax planning.

Create a Will

Making a will is an integral part of estate planning because it ensures that your assets are distributed how you want them to be. In the absence of your will, your assets will be distributed per intestacy rules and may be subject to inheritance tax (IHT). 

If you are concerned about who will inherit your assets and want to reduce your potential IHT bill, you must make a will. Remember that there is no inheritance tax on assets given between spouses.

Donate Part of Your Assets to Charity

The assets you plan to offer to charity is exempt from IHT. If you transfer at least 10 per cent of your total assets to charity, the IHT rate on the remaining assets goes down from 40 to 36 per cent.

Distribute Your Assets

If you give away assets and live for at least seven years, all gifts are tax-free, including inheritance tax. Otherwise, dying within seven years will make the inheritance tax levied on a sliding scale. You can also make gifts of up to £3 thousand per year completely free of IHT, among other things.

Present Assets Free of Capital Gains Tax

If you have assets that have depreciated since purchase, such as property and shares, you may pass them on without incurring Capital Gains Tax (CGT). Any recovery in the value of assets would be accounted for in the recipient’s estate, and any gain would be exempt from potential IHT liability after seven years.

Maintain Below the IHT Threshold 

The inheritance tax threshold for individuals in the tax year 2021/22 is £325 thousand. On death, this nil-rate IHT band is transferable to a spouse or civil partner, for a total nil-rate band of £650 thousand for couples. 

A main residence transferable allowance was declared in the 2015 Summer Budget, gradually increasing from £100 thousand in 2017 to £175 thousand per person by 2020/21. It potentially allows people to avoid inheritance tax on property. 

As a result, the main residence transferable allowance for 2021/22 is £175 thousand. This amount is in addition to the IHT nil-rate threshold. As a result, a married couple or people in a civil relationship may transfer up to £1 million without facing IHT.

Place Your Assets in a Trust 

If you place assets in your trust, they will not be included in your estate when you die, thereby avoiding inheritance tax. You could, for example, place assets in a trust for the benefit of your children when they reach the age of eighteen. 

Conclusion

If your entire wealth is tied up in real estate, you may want to think about applying an equity release scheme involving a lifetime mortgage or home revision scheme. Based on what you choose, you will either borrow money against your home’s value or sell a portion of your home at a lower market value while remaining in the property.

This reduces your assets and increases the debts that count against your estate. The money you receive can be passed on to your future beneficiaries or spent on yourself. To avoid paying inheritance tax, you must survive the gift for seven years.

If you need assistance with inheritance tax planning in the UK, turn to Wills and Probate. We can help in all aspects of future and financial planning. Find out more when you browse our website today!