How to minimise inheritance tax liability
- 1). Calculate your assets while they are still yours. The thought of paying inheritance tax may seem scarier than it actually is, so start by calculating the worth of your estate. This must include savings, investments, properties, personal property and an ISA. If the total amount of your estate falls below the threshold set by the government, then tax doesn't need to be paid. If the assets' total is higher than the threshold, then you can calculate how much inheritance tax will be on your estate and take steps to dispense of any property that could help lower the total of your estate.
- 2). Write a will and place assets into trusts. In order for your estate to be dealt with without legal wrangling, a will is the best place to clearly state your intentions for every asset. Setting up a trust while you're living means you can reduce the value of your estate; by letting go of the legal entitlement of any money you set aside in a trust, the overall value of your estate may take you under the tax threshold.
- 3). Leave your estate to your spouse/civil partner. Passing an estate to your legal spouse is exempt from inheritance tax. You can also transfer the unused part of your inheritance tax to your spouse when you pass away so those who benefit from their estate can have a reduced tax bill.
- 4). Reduce your home. The largest asset in an estate is usually the family home and could take up most, if not all, of your tax threshold. You could think about reducing the size of your property while you're living. Alternatively, if you are part of a couple, register the home in both names; when one of you dies, the home automatically transfers to the living spouse and is not considered part of the estate.
- 5). Give away assets while you're living. Reducing your estate by giving gifts is a legitimate way of reducing your estate and therefore reducing the eventual inheritance tax bill. You can give up to £3,000 a year as a gift, or £6,000 if you haven't gifted the previous tax year, and this amount is exempt from tax. Other gifts exempt include any donation to a political party and charity; up to £250 to any people; and a wedding gift of £5,000 to your child, £2,500 to your grandchild and £1,000 to a friend.
- 6). Invest in things that offer inheritance tax benefits. Certain tax-free options in your life (e.g. ISA) may not be when you die so shares in unquoted businesses, woodlands, farmland and the Alternative Investment Market offer tax relief.
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