7 Top Tips to Help Reduce Inheritance Tax
Leave your Estate to your Spouse or Civil Partner
One of the most straightforward and effective strategies for minimising inheritance tax is through your spouse or civil partner. Under English law, assets left to a spouse or civil partner are often exempt from inheritance tax. This means that upon your passing, your assets can be transferred to your partner without incurring any tax liability.
Leverage pension planning
Pension planning is an often overlooked method for reducing inheritance tax. As pensions are not considered part of your taxable estate, they are an excellent tool for helping to preserve your assets.
By maximising contributions to your pension fund, you can ensure that more of your assets are shielded from inheritance tax. Be sure to consult with a financial advisor who specialises in pension planning to optimise this strategy for your circumstances.
Take Out a Life Insurance Policy
Life insurance is a great way to insure against inheritance tax. By setting up a life insurance policy, you can provide a tax-free lump sum to your beneficiaries, without having to dip into the assets you have left them.
Additionally, life insurance can be used strategically to distribute your assets equally between your heirs. This can be particularly useful if you have a complex family structure, or if you wish to ensure that specific individuals receive a fair share of your estate.
Give your assets away as gifts
One of the simplest strategies you can implement to avoid inheritance tax altogether is to either spend your savings or give them away during your lifetime, meaning that you can gradually transfer your wealth to your loved ones.
The amount you are allowed to give each tax year is up to £3,000. This amount can be split between several beneficiaries. However, if you were to pass away within seven years of gifting your assets, you would have to pay inheritance tax. Fortunately, you might be taxed at a lower rate under the ‘taper relief’.
Set Up a Trust
A trust is a legal arrangement that allows you to set aside assets for the benefit of specific individuals or groups. This could be an invaluable tool for reducing inheritance tax, as assets placed in a trust are not considered part of your taxable estate.
There are various types of trusts, such as discretionary or charitable trusts. To determine which is the right trust for your specific goals, it may help to speak to a financial advisor.
Leave money to a charity
A wonderful way to reduce inheritance tax while making a positive impact is by leaving a portion of your estate to a charity. If you leave at least 10% of your estate to a registered charity, the tax rate on the remaining estate drops from 40% to 36%. This means more of your hard-earned assets go towards causes you care about.
Before finalising this decision, it’s a good idea to research and select a charity that holds special meaning for you.
Document your Intentions Clearly
One last and yet crucial tip is to document your intentions. Ensuring your wishes are clearly documented in your will and any associated legal documents can help prevent misunderstandings and disputes down the line.