How to Avoid Inheritance Tax

Avoid Taxes

After you’ve died, the entirety of your estate (which could include property, belongings, and money) goes on to the beneficiaries you’ve named in your will. If all of that is worth more than £325,00, your beneficiaries will have to pay inheritance taxes. If it’s less than that, you don’t have to pay anything. While not every country requires an inheritance tax, the UK does. In fact, the UK is among just three countries that levy such a tax on the estate itself, and while that’s frustrating to many, it’s just one way the UK pays for a variety of different programs. For many who will leave fairly large estates behind, though, learning how to avoid inheritance tax problems is an absolute must. Not sure what to do? The key is to learn more about the answer to “how can I avoid inheritance tax UK officials will levy”, and these frequently asked questions are a good way to explore the issue, understand what taxes will be levied against your estate, and learn what you can do to avoid them.

What Is Inheritance Tax?

Inheritance tax is levied against any estate with a value above £325,000. Once your assets exceed that amount, everything above it is taxed at a rate of 40 percent. Imagine, for example, that your assets are worth £850,000. The first £325,000 of that will not be taxed at all. It sits in a “nil-rate band.” The remaining £525,000, though, will be taxed at a rate of 40 percent. Your beneficiaries, then, are left with the original £325,000, and 40 percent of £525,000 or $315,000. They’re essentially left with just £640,000 of your original £850,000. It doesn’t seem quite fair, does it? A closer look at numbers like these is the reason so many people ask “How can I avoid inheritance tax.” You want to be able to pass as much as possible on to your beneficiaries. It’s tough to do that with an effective tax rate of 40 percent. The taxes themselves must be paid within six months of the individual’s death, and it’s usually handled by the executor of the will. That, too, can create an issue as six months is such a short amount of time when you consider how many issues must be dealt with after the death of an individual. What’s more is that probate – the time period when your estate is usually sorted out – usually takes more than six months, so the assets usually haven’t even been released back to the individuals before the taxes are due. As a result, if there are not enough liquid assets (like cash) to pay for the taxes, property may have to be sold to cover the cost of the taxes themselves. If the taxes are not paid, an interest charge is levied. So, back to the original question so many are asking themselves – “How can I avoid inheritance tax.” Fortunately, there are a few ways around some parts of the inheritance tax that may help your beneficiaries keep more of your assets in tax. One of those is the home you own.

How Can I Avoid Paying Taxes on Inherited Property?

In the eyes of inheritance tax, property works very differently. If you are asking yourself “How can I avoid paying taxes on inherited property” so you can pass your primary residence on to your own kids or your grandkids, you’ll get a pretty positive answer. There’s more protection in the law here than anywhere else. There’s currently a “main residence nil-rate” band that isn’t true for any other kind of asset. Right now, it sits at £175,000, but it goes up on a regular basis. If your home is worth less than that, you can pass it on tax-free to your children or your grandchildren. Essentially, it adds quite a bit to your nil rate band. Now, instead of just being able to pass on £325,000, you can pass on £500,000 to your beneficiaries as long as your primary residence is included in that amount. There are a few caveats, though. First, it has to be your primary residence. It cannot be a vacation property or even a property you rent to others. Additionally, this only applies if you have children or grandchildren to whom you’re passing the property. If you are leaving it to other relatives or friends, it will still be subject to inheritance taxes.

Equity release is another answer to the “How can I avoid paying taxes on inherited property” question. This works if you’ve owned a property for some time. The longer you own a property, the more equity you have in the property – generally. As a result, an equity release scheme allows you to reduce the overall value of your home. There are two main ways to do this. The first is a lifetime mortgage. This allows you to borrow part of the value of your home with interest. When you sign up for this kind of loan, the interest rate is fixed, and typically, nothing has to be paid back unless you die or actually sell your home. For example, imagine your home is worth £575,000. With a lifetime mortgage, you could take small amounts as much as you wish (up to 27% of the property’s value or £155,250 in this example) to make gifts to various people or go on holiday as you wish.

If your beneficiaries inherit a house with this kind of mortgage, the executor will repay the mortgage (with interest), and if anything is left, they get the proceeds. In some cases, no equity might remain on the proceeds, so nothing would be inherited.

The second way to do this is with a home reversion plan. In this set-up, you sell part of your home to a home reversion provider. They either give you a lump sum of cash or make regular payments to you. You’re allowed to live in the property completely rent-free, but you have to agree that it will be maintained and insured as long as you live there. The overall amount you get is equal to a certain percentage of the value of the property – approximately 50% in most cases. The home reversion provider then gets to sell the home after you’ve passed.

How Much Can I Gift to Avoid Inheritance Tax?

Gifting is another good answer to “How can I avoid inheritance tax.” The goal here is to reduce the overall size of your estate that can be taxed. You do this by giving your beneficiaries significant gifts while you’re still alive. The rules about gifts, though, are a little complex, so the answer to the question “how much can I gift to avoid inheritance tax” isn’t a straightforward one. Wondering “how much can I give away to avoid inheritance tax?” The law says you can give £3,000 every year. If you don’t give it away one year, though, the exemption carries forward from the previous year. So, what’s a good example to the answer “how much can I give away to avoid inheritance tax”? For example, you could give £6,000 every two years. No one would be required to pay inheritance tax on that money. You can also give fairly large gifts at weddings. Parents can give their children £5,000 as a wedding gift. Grandparents can give a grandchild £2,500 as a gift. You can give anyone £1,000 as a gift.

Outside of those kinds of gifts, there’s another solution to the question “how much can I give away to avoid inheritance tax.” You may give absolutely anyone £250 at any point in time, but you can only give one of those per person.

“How can I avoid paying taxes on inherited property” is necessary knowledge, because if you give more than that, the law classifies the gifts as PETs, or potential exempt transfers. In the event you die seven years after you’ve made a larger gift transfer, the person won’t have to pay any inheritance taxes on the amount. If you die before that, though, the gift recipient will have to pay inheritance taxes on the amount.

There are also gift exemptions for money you give to charities as well as political parties. One answer to the question “How can I avoid paying inheritance tax” is to leave plenty to various charities and political parties. All of these gifts are exempt from inheritance tax. Moreover, if more than 10% of your assets are dedicated to charity in your will, you actually have the ability to reduce the overall inheritance tax you’re expected to pay. You can reduce it as far as 36%.

Gifting your pension is also a good idea, and it’s one clear answer to “How can I avoid paying inheritance tax”. These are completely free from inheritance taxes if you die before you are 75. If you do after that, they’re usually taxed at a much smaller rate – typically just 20%. As a result, if you can afford to live off of other assets, you can save your pension for your beneficiaries.

Is My Life Insurance Policy Subject to Inheritance Tax Too?

Many looking for an answer to “How can I avoid inheritance tax” wonder about their life insurance money, and for good reason. It’s an excellent way to reduce the impact inheritance tax can levy on your estate, particularly if you know the taxes will need to be paid before the estate is fully distributed.  In fact, some firms market life insurance policies specifically designed to pay inheritance tax bills. This can ensure your assets remain intact and nothing has to be sold to pay the overall taxes. The policy, though, must pay into a trust or the payment from the policy becomes part of your overall estate. Trusts tend to be a way to put assets outside of your estate so no inheritance tax must be paid, but they can only be set-up through an independent financial advisor, as the rules are quite complicated.

Can I Just Spend the Money?

This is actually the single best way to answer the question “How can I avoid the inheritance tax UK officials will levy.” There are lots of ways to spend the money so it benefits your heirs, too. One way is to purchase a funeral plan. Overall, the costs of funerals across the UK are going up on a daily basis. In fact, the average funeral in the UK currently costs £6,000. The last thing you want is to leave expenses for others to handle for you, and arranging for your funeral before you’re gone is a great way to spend the money and save your beneficiaries some money. Usually, funeral plans will cover all of the costs involved, and you can typically pay for them in instalments or all at once. You’ll need to carefully read the contract, too, to make sure you understand exactly what the plan covers. Some plans don’t cover costs like embalming and the burial plots themselves, so understanding what other costs might be involved is a must. There are almost 30 funeral plan providers in the UK, so shop around to better understand what’s possible.

You may also want to make a few big purchases. Imagine, for a moment, getting everyone together for a huge holiday together to make some memories. Sure, it might reduce the amount that you leave your beneficiaries, but they’ll have the memories you made on holiday together, and that’s something they’ll always be able to hang on to. Spending lavishly on Christmas and birthday gifts is another great way to give them something that they can treasure while you’re alive and well after you’re gone. Consider gifts that will hold their value like jewellery or even property and vehicles. They’ll have the gifts you gave them well after you’ve died and no one will have to pay inheritance tax on those gifts. Don’t forget that you can give to almost anyone, too. This might even allow you to give valuable gifts to your littlest grandchildren that their parents can look after until they’re old enough to handle them. Imagine, for example, having a beautiful gold pocket watch set aside for your grandson until he is old enough to carry it. What an amazing legacy that might be for your family!

Easily one of the best ways to handle the money that might be subject to inheritance tax is to find a way to spend it while you’re alive so your children and other beneficiaries don’t have to fight for it after you’re gone. Simple things like finding presents that will hold their value long after you’re gone and paying for things in advance like funeral plans are good option.

Overall, How Can I Avoid Inheritance Tax UK Officials Levy On My Estate?

If you’re still left wondering the answer to “How can I avoid inheritance tax,” your best bet may be to work with a solicitor who specialises in estate planning. He or she will help you find the answer to “How can I avoid paying inheritance tax” and help you consider a number of good options that will help all of your descendants get what they need without the heavy estate taxes.

Maybe the single worst thing you can do as you work to find the answer to your question, though, is just to stop thinking about it. It’s very possible to carefully plan your estate so that your beneficiaries can get as many of your assets as possible without the need to pay hefty inheritance tax fees. Unfortunately, though, that just can’t be done without property planning. If you’re hoping to avoid the problem so you can leave your home or your other assets to those in your will, and you’d rather not see 40% of what you’ve worked so hard over the course of your life go to taxes, the best thing you can do is to work with a financial planner and a solicitor to find the right ways to protect the assets you’ve worked so hard to build over time.

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