Making an estate plan is one of the best ways to avoid having to pay too much inheritance tax.
It may even help you to avoid paying inheritance tax altogether. This is possible because when you are able to review all your assets sufficiently early. You can outline your wishes, portion and divide the assets intelligently based on what is allowable under the legislation and current rates of tax. There are several main ways in which you can avoid paying inheritance tax:
1. You can make gifts to family members and friends
Making gifts are one of the best and most efficient ways to avoid paying inheritance tax.
If you can afford to do so, distributing your money early on rather than waiting until after you pass and leaving sums in your will is very much a tax-efficient choice. This is because the overall amount of assets you leave behind (above £325,000) would otherwise be subject to inheritance tax. This is currently set at a rate of 40% – but it is possible that this could rise unexpectedly in the budget.
Under inland revenue rules, you are allowed to give cash gifts of up to £3,000 a year. So with a little forward planning you could give away a significant amount without having to pay any inheritance tax. If you choose to give away more than £3,000 per year the additional amount will be subject to capital gains tax.
There are certain types of gifts that are exempt from taxation altogether. These include gifts between spouses or civil partners, gifts to universities or charities and any gifts given over seven years before your death.
2. You could set up a trust fund
Traditionally trust funds are set up to ring-fence assets for children and young people who are not yet financially independent or in apposition to manage their own financial affairs.
But trusts are also a great way to reduce or avoid inheritance tax payments entirely. Trust funds are fully protected from any inheritance tax and can be set up at any time.
Trusts can be used to your benefit in a number of ways. Trusts can be set up to provide advance payments drip-fed to family members to allow them to receive their inheritance early. Trust funds also have tax benefits for those with life insurance policies, as they too provide a significant amount of tax relief.
Without having trust funds in place your life insurance pay out is added to your estate and will be taxed under IHT. When your life insurance is set up within a trust it can not be included in any inheritance tax calculation.
3. Be intelligent spending your wealth
Live and spend within your means and enjoy your wealth. Yes it is important to be saving for necessary future expenses but allow yourself some spending on items and experiences you will enjoy.
4. Make provisions for any necessary spending
You should not forget to factor in any necessary spending such as home improvements, mortgage payments and home maintenance. There may be other things you may need at some point in the future such as a new car.
5. Don’t forget to research your own individual situation
Inheritance tax rules and regulations may vary depending on your personal situation. For instance, for married couples or those in a civil partnership the threshold can possibly increase to double that of an individual. That is currently £650,000 for a couple.