All of the property, investments and possessions you’ve built up over the years are testament to the hard work you’ve put in over your career.
Put together, they form your estate, which you no doubt want to be distributed among your loved ones, who are known as your beneficiaries for inheritance purposes.
However, a portion of your estate’s value might be lost to inheritance tax (charged at 40% on the value of an estate above £325,000) if you don’t plan your affairs properly.
Luckily for you though, there are various ways to protect your estate from unnecessary tax charges, which we’ve explained in detail in this blog.
Make the most of gifts
Inheritance tax is charged on the value of your estate that is above £325,000 (the nil-rate band), and the residence nil-rate band for property (£175,000). Therefore, one of the more obvious ways to reduce your bill is to gift it away to your beneficiaries before you die.
While you can do that, there are some things you need to bear in mind.
First, you need to know that you can only give up to £3,000 worth of gifts tax-free each tax year. This is known as your ‘annual exemption’. Small gifts you make to beneficiaries below £250 are also tax-free – every time.
However, and this is the second caveat, you need to make sure that you understand the seven-year rule.
This rule means that you can give away however much you want to without any tax deductions as long as you live for the next seven years.
If you pass away during those seven years, the tax that will be applied will depend on the exact date of death, as follows:
- three to four years after the gift was made: 32%
- four to five years: 24%
- five to six years: 16%
- six to seven years: 8%
- seven or more years: 0%.
Third, for the gift to count as a tax-free gift, you are not allowed to benefit from it, even if you just enjoy a subsidised rent to live in the family home you gifted – if you wanted to keep living in the house, you would have to pay market rent rates just like anybody else to not face a tax charge.
In short: you are not just signing away possession of the gift, but the full benefit of it.
Make full use of a trust
More and more people are making good use of trusts nowadays as part of their wider inheritance tax plan.
A trust is a legal agreement that allows you to place your money, property and investment in the hands of a trustee who will look after it on your behalf. The trustee will be a professional, qualified to look after your finances – we would be willing to act as your trustee.
There are multiple types of trusts that you can use, some of which might be better suited for your needs than others. However, the way that they are taxed may differ, also.
You would usually face a 20% tax charge when setting up a trust if its value exceeds the nil-rate band, although there are some exemptions to this broad rule.
Every 10 years after that, the assets held in the trust need to be revalued. A 6% tax charge will apply on the total of the assets, minus the nil-rate band.
This approach often proves to be more tax efficient than the usual gifting approach, but there are more moving parts that you need to watch out for. Always talk to an adviser before setting up a trust.
Donate to charity
Just like gifts that you can leave to your family, the parts of your estate that you leave to a UK charity are also exempt from inheritance tax.
If you leave over 10% of your estate to charity in your will, you’ll pay a reduced 36% tax on the total value of your estate that is above the threshold.
That might not sound like a good deal, so let’s put some actual figures to those percentages.
Let’s say your estate is worth £525,000, and no additional thresholds or exemptions apply. If you didn’t give anything to charity, your estate would be taxed £80,000 (40% of £200,000). But if you did give 10% of your estate to charity (£20,000), it would face a £64,800 charge (36% of £180,000).
You’ll notice that by giving to charity, the amount of money your beneficiaries would get in total is actually reduced. However, it is a very tax-efficient way to give to charity as part of your will, if that is something you want to do.
Call us on 020 7330 0000 or fill out a contact form and a member of our estate planning team will make contact to help you get started with your estate plan.