Five Tips on How to Protect Your Family’s Inheritance
Inheritance tax can put a serious dent in the wealth you bequeath your family.
In light of changes to the law this year, here are five tips on how to minimise your inheritance tax burden.
Use Your Partner’s Allowance
The nil-rate band for inheritance tax, commonly referred to as the inheritance tax allowance, is one of the most important tools in reducing your income tax.
It’s the amount of money you can simply leave tax-free. For 2018, this has stayed at the previous level of £325,000 per person.
There is also room to increase the tax-free lump sum.
If your spouse or civil partner dies before you and they don’t use up their whole allowance, then you inherit the remainder of that allowance.
Keep a good record of what they left and how much allowance remained, then leave that with your will.
Be Careful with Property
Various aspects of property ownership can reduce your tax bill.
Firstly, there’s the residence nil-rate, which was introduced in April 2017.
If your estate includes a property which will go to your heirs, then you can claim an extra
£125,000 of tax-free inheritance.
This allowance will rise £25,000 a year until it reaches £175,000.
If you don’t have enough wealth free to make the most of gifts and trusts, then you can free up some value from your property.
By taking out an equity release scheme, you can either borrow money against the value of the home or sell part of it while still living there.
This will reduce the taxable value of your estate through either mortgage debt or a lack of full ownership.
If you own a property with your partner, consider how that ownership is set up legally.
Most people own property “jointly and severally”, meaning that on own partner’s death the other inherits the home without having to pay any taxes. This is usually the best option.
But you could also opt for ownership as “tenants in common”, meaning that you each own a portion of the property.
This would allow you to pass your part on to someone else at death, so the property isn’t inherited all at once by your descendants on your partner’s death, reducing the tax burden.
Make Gifts the Right Way
By giving money to your inheritors before you die, you can potentially reduced inheritance tax.
There are legal limits to this, to stop people giving away all their wealth and so avoiding taxes.
Though the government has shown an interest in changing them, the rules are currently complicated, and so it’s worth paying attention to the details.
Small gifts can be made at any time without incurring tax on your death. These are:
- Gifts of up to £3,000 per year. Gifts of up to £250 per person.
- Gifts that are part of your everyday expenditure.
- Variable values of gift to people getting married, depending upon how you’re related to them
Beyond that, tax levels depend on how long before your death you made the gift:
- More than 7 years – no tax. 6-7 years: 8%
- 5-6 years: 16%
- 4-5 years: 24%
- 3-4 years: 32%
- Less than 3 years: the full inheritance tax rate of 40%
Carefully calculated, gifts are therefore a good way of minimising your inheritance tax. If you can, give early, give often, and give within the limits of these rules.
Set Up a Trust
Another way to save money from being subject to inheritance tax is to put it in a trust.
This trust can be established while you are still alive or as part of your will. This separates the money from your estate and so excludes it from your inheritance tax allowance.
To count for income tax exemption, the trust must not benefit you, your spouse, or any of your children under eighteen years old.
There are also other complications, not least in terms of tax. Capital gains tax and income tax may apply to the trust, as might inheritance tax, depending upon how the trust is set up.
If you’re going to set up a trust, take expert advice and make sure it’s done right.
Give to Charity to Offset Inheritance Tax
If there are causes that you want to support, then leaving them some of your wealth can cut your inheritance tax.
Any money left to a charity, or to a political party that has had at least one MP elected, is exempt from inheritance tax and excluded from your estate, reducing the size of wealth your inheritors pay tax on.
If at least 10% of your taxable estate goes to charity (though not a political party) then this can also reduce the inheritance tax rate for your heirs from 40% to 36%.
When combined with other careful steps, giving to charity can ensure that you do your best, not just for the causes you believe in, but for your heirs.
Paul Connolly
Paul Connolly has been a journalist for more than 20 years, as a reporter and editor for Argus Media, Reuters, The Times, Associated Newspapers and The Guardian. He has covered Islamic Finance for Reuters in the 1990s. Paul has since helped launch three newspapers, as well as reported from Tokyo, Los Angeles and Stockholm.
