Importance of Inheritance Tax Planning

You will not live forever. But you can surely help your loved ones inherit much of the wealth and property that you have accumulated throughout your lifetime. If the total property surpasses the inheritance tax limit, then the family will have to pay the bill soon after you die. However, this problem can be eliminated by you if you do inheritance tax planning in advance so that the bill is kept to a minimum.



Inheritance tax is a tax that your beneficiaries pay if the property amount crosses the inheritance tax threshold. If the property amount is 325, 000 pounds, then the property is tax-free. This is also known as the IHT nil-rate band. Everything above this threshold will be taxed at 40 percent. This can lead to a huge bill amount for the bigger estates.

 

How to do inheritance tax planning?

Inheritance tax planning is very vital for you so that you can save your beneficiaries from paying extra taxes. If you leave the property to your civil partner or spouse, they will not have to pay this tax. Charities are also instances where inheritance tax can be levied as they are exempted from such taxes.

 

In this article, we will be pointing out simple ways that can be used by you to reduce the burden of inheritance tax on your beneficiaries.

 

Using gifts

If you give gifts for seven or more years before you die, then that is exempted from inheritance tax. However, you must be able to show that they are just gifts and nothing else. If you continue to get rent from another of your property, then it is a gift with reservation of benefit. This will be part of your estate even after seven years. The same will apply in situations where you give your home and continue to live in the home free from rent.

For the smaller gifts you give, you do not have to think much about the seven-year rule. In any tax year, you can give a 3000 pounds gift that will be free from inheritance tax. This allowance is usually carried over to the next year. So, if you have not used this year’s allowance, this will be carried forward in 2021.

 

The other exemptions to inheritance tax are wedding gifts. 

 

With the help of the adviser, you can easily use the allowances to reduce your property size and also reduce the amount of tax that the beneficiaries pay.

Using trusts

Using trust is another good way of inheritance tax planning. A trust allows one to set money aside to support a beneficiary in a certain manner at a certain time. For example, you can help the beneficiary to pay his/her fees for the degree course program. The trusts can be placed outside the estate and hence they will be free from the purview of inheritance tax.

Setting up a life insurance policy is also helpful in covering the inheritance tax bill. If the life insurance policy pays into a trust that is outside the property you have, then the pay-out will not be a part of the tax structure. This means it will be free from inheritance taxes. It can instead be used to pay HMRC.

 

Trusts are a specialist’s method that is used for inheritance tax planning. It is better to consult with your financial adviser and a solicitor before you start setting up a trust. 

Another important step in inheritance tax planning is creating a will and keeping it updated. You will also need a trusted executor as he will be the person who will be responsible for paying the inheritance tax from your property. The solicitor on the other hand will help you to make the will.

 

Hence these are some simple ways that you can use for proper inheritance tax planning. 

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