Avoid Inheritance Tax: A UK Guide On How To Minimise Your IHT Bill [Step-By-Step]
If you want your children to avoid paying tax on money you’ve already been taxed on, then this articles for you!
Just in case you’d prefer to watch a video instead, I made one too:
Today I’m going to share exactly how you can avoid as much inheritance tax as possible, step-by-step.
And before you think this article is just for the very wealthy, think again. If you have assets worth over £325,000 you could be liable for IHT.
And with the inheritance tax rate being a whopping 40%, I’d bet you’d rather not…
Now, 80% of people believe that IHT rules are too complex.
So…
I asked Estate Planning Expert, Oliver Cooper, to help me put together a plan that’ll help break it down for you.
As Oliver likes to say “Inheritance Tax is a voluntary tax, it’s only paid by people that don’t plan for it”.
Let’s dive right in:
UK Inheritance Tax: The Basics
Before I jump into the steps, there are a couple of things you should know.
First off, the standard IHT rate of 40% is only applied above the threshold.
The threshold for a single person is £325,000. The threshold for a married couple or those in a civil partnership is £650,000.
Finally, between a married couple if everything passes to the spouse on first death then there’s no tax to pay.
With that out of the way, let’s begin with step 1.
Step 1: Gifting Monies
There’s no limit to how much you can gift.
BUT
There’s a seven year rule. If you die within seven years of gifting your assets, those assets will be liable for tax.
You can giveaway up to £3,000 per year tax free. And the thresholds still apply to gifts above that.
Now before you get too excited. There are strict conditions on gifting.
The person gifting the asset, cannot retain the benefit of the gift moving forward. If you do, HMRC will view the gift as yours and it will remain in the estate for IHT calculations. In other words, if you give the kids the house, you best not continue living in it.
Step 2: Gifts Out Of Taxed Income
This has to be from disposable income (money you have already paid income tax on) and it has to be on a regular basis and cannot effect your standard of living.
For example:
If your disposable income was £60k and your outgoings were only £30k, this would leave a excess of disposable income of £30k a year. This excess could be gifted instead of accumulating and is not subject to any 7 year rule and are exempt from IHT.
Step 3: Convert Your ISAs
You can convert your ISAs into Inheritance Tax Exempt ISAs.
Step 4: Take Advantage Of BPR
BPR is Business Property Relief.
Making investments that attract BPR will reduce your IHT liability.
Step 5: Take Out Whole Of Life Insurance
This is probably the second best step you can take, behind step 7.
You can take out a whole of life insurance policy that upon your death, will pay the tax bill so that your children don’t have to.
Yes, you’ll have to spend some money upfront but depending on the size of your estate, it could be well worth it! Don’t cheap out and risk throwing money away to HMRC.
Step 6: Marital Status
This could backfire. But if you’re in a long-term partnership and haven’t tied the knot, consider doing so for tax purposes. There’s nothing more romantic than saying honey, will you reduce the IHT bill for the kids?
Remember what I said at the start of this video? There’s no tax to pay between a married couple or those in a civil partnership.
Step 7: Tax Planning Wills
Passing your estate directly on to your children, could increase their estates for inheritance tax! Whoops, you’ve just given them the same issue you had when it comes to passing the estate over to their children and trying to avoid IHT.
A direct inheritance from parents means the children’s inheritance is not protected should they divorce, go bankrupt or die before their partner.
Your best bet is to use a Trust.
By passing via a Family Trust, the inheritance does not increase your children’s estate for IHT purposes.
The Family Trust also protects the inheritance from being taxed again through each generation. And protects the money in the event that your children divorce or go bankrupt.
In my view, this makes it by far the best step you can take to reduce your IHT liability.
Again, it’s something that’ll cost you. But we’re talking about spending a few thousand pounds in order to save hundreds of thousands of pounds. This isn’t the time to be cheap.
Conclusion
Those are my seven steps to minimising inheritance tax in the UK. I hope you found them useful.
Bear in mind that paying the standard 40% rate of IHT can have a devastating impact on wealth over just a few generations.
So, if you’re not going to take IHT planning seriously, at least make sure you plan to spend it all before you die!
For those of you that do want to avoid paying excessive taxes on your inheritance:
Make sure you get advice!
Yes, it will cost you, but its worth spending a couple of thousand in order to save tens or even hundreds of thousands.
Finally, this video couldn’t have happened without the help of Oliver Cooper over at Foresight Estate Planning.
I don’t know a thing about IHT, so I asked Oliver to help out with this article.
Oliver is the absolute expert when it comes to Estate Planning.
If you have a sizeable estate and need IHT Planning help then give him a shout!
