To reduce or avoid inheritance tax, individuals will need to take action to ensure their affairs are in order. It can be difficult to know where to begin, and so Express Money has highlighted six key tips and tricks to help.
Gifting can perhaps be one of the best ways for Britons to avoid being hit with a hefty tax bill on their death.
The action helps to reduce the value of a person’s estate for inheritance tax purposes, and gifts can vary.
- Household and personal goods, for example, jewellery or furniture
- A house, land or buildings
- Stocks and shares on the London Stock Exchange
- Unlisted shares held for less than two years before the person’s death.
If a person survives for seven years from making the gift, it will fall outside of an estate and there is no inheritance tax liable.
Dying within seven years of the gift being made means a proportion of the gift, or indeed all of it, will be subject to inheritance tax – on a taper scale. This is commonly referred to as the seven year rule.
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Inheritance tax does make room for some allowances to help people reduce their inheritance tax liability.
For example, people will not pay IHT on the first £325,000 of their estate, known as the nil-rate band.
If a person gives away their home to their children or grandchildren, their threshold can increase to £500,000.
There is normally no inheritance tax to pay if either:
- The value of the estate is below the £325,000 threshold
- Everything above the £325,000 threshold is left to a spouse, civil partner, a charity, or community amateur sports club.
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There are particular gifts which are totally exempt from inheritance tax.
- Gifts between spouses
- Wedding gifts
- Small gifts
- Wedding gifts
- The annual exemption
- Gifts to political parties and charities.
People are able to give away a total of £3,000 worth of gifts annually, without them being added to the value of one’s estate under the annual exemption.
As many gifts of up to £250 per person are allowed each tax year, as long as a person has not used another allowance on the same individual.
Each tax year, a tax free gift can be given for a wedding or civil partnership with the value of:
- £5,000 for a child
- £2,500 to a grandchild or great-grandchild
- £1,000 to any other person.
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Business Relief allows some assets to be passed on free of inheritance tax or with a reduced bill, the Government has said.
People can get Business Relief of either 50 percent or 100 percent on some of an estate’s business assets, which can be passed on:
- While the owner is still alive
- As part of a Will.
Others may be able to get Agricultural Relief if their estate includes a farm or woodland.
If a person puts certain assets into a trust, they no longer belong to them, as long as certain requirements are met – and therefore will not be included in an estate for inheritance tax.
However, it is worth noting trusts can often be complicated to establish and run.
As a result, before embarking upon this action, individuals are generally encouraged to seek the assistance of a financial adviser.
Making a Will
A Last Will and Testament clearly lays out a person’s wishes for what should happen after they die.
Those who do not make a Will will die intestate, meaning the Government will decide how the assets are divided.
It could mean the Government takes more of a tax chunk out of an estate than would have been required with a Will in place.