Tax planning is among the essential parts of your financial strategy. So, it is crucial to understand the tax implications of your investments, including inheritance tax (IHT). Understanding these implications will help you legally avoid taxes where possible. This act saves you money and makes sure you don’t pay more than you need to.
Inheritance tax in the UK
Inheritance tax in the United Kingdom stands at 40% on estates worth over £325,000. The government imposes an inheritance tax on any amount above that threshold.
For instance, if you have inherited a property worth £350,000, the 40% taxation will be applied to the excess £25,000 (350,000 minus 325,000).
Avoiding inheritance tax in the UK
Now that you know the rules and regulations of IHT in the UK, it’s time to learn how to avoid it. Here are various ways you can legally do so:
1. Make sure the inheritance is below the threshold
The first way you can avoid this taxation is to ensure your property value is below £325,000. The government doesn’t impose a tax when your spouse inherits your house. The property must be valued under £500,000 for you to be exempt from tax. The maximum threshold for real estate is £1,000,000.
2. Give away your home before dying
If you own a domicile or flat, you can give it to anyone for free. You will not be charged anything for gifting a property regardless of its value. There won’t be any inheritance tax if you move out of the house and live for another seven years. Also, the new owner must move into the property immediately after you vacate it.
If you are alive after seven years and want to live in the property, you have to pay rent at the current market prices. You must also pay for utility bills and anything else.
3. Write a will as early as possible by taking the help of an estate advisor
A will is a legal document that states who gets what when you die. It is your last chance to make changes to your estate plan. If you write a will, there is no inheritance tax for any property inherited by your spouse.
There are several inheritance tax and estate planners that you can contact for expert help. They will charge you a small fee, sign and print off the will.
4. Put all your property to a trust
This method is similar to giving away your property, as mentioned earlier. However, instead of gifting it to someone, you put it into a trust. A trustee manages the assets while you are still alive. When you pass away, the trustees distribute the wealth according to the terms written in the trust deed.
You can set up trusts for different purposes, such as leaving an inheritance to children, paying for education expenses etc.
5. Use life insurance
Life insurance policies are used to provide financial security for your family if something happens to you. Most life insurance policies are exempt from this tax.
6. Donate to charity
Another good way to avoid inheritance tax is donating your property to charity. Charities usually get donations from individuals, companies and governments. You can donate your property to a charity, and they will take care of everything.
You could also donate 10% of your wealth to charity, and you will be liable to pay inheritance tax at a reduced rate of 36%
7. Sell your property
Selling your property may seem like a bad idea because you lose money by selling it. But if you sell your property in the right conditions, you could make some profit. For example, if you bought a house for £100,000 and now you want to sell it for £150,000, you would make a profit of £50,000.
Please note that this is the last option you would want to take if all the others in the listing prove to be unsuccessful. You will leave nothing to your dependents by selling your home or property. Also, if they need to buy any property, they will still pay taxes for property transfer.
Conclusion
The above are ways to avoid inheritance tax in the United Kingdom. Remember, the best thing is to consult with a professional accountant or lawyer before using any mentioned methods. Such a professional will advise you on the best way to avoid the tax.
