How to plan for inheritance tax

A recent HMRC report suggests there are more than £7.5bn cases of inheritance tax paid in the 2023-24 tax year. 

In previous years inheritance tax was only a concern for wealthy land and property owners. But now, that the threshold of £325,000 has not risen for a number of years and property prices have risen it has become an issue for a greater number of people.

The total worth of your assets with inheritance tax is included are as follows:

• The sum of your savings

• All of your personal possessions

• The properties you own

• Any number of assets you gave away, seven years before death

• From 2027, the value of your pension

How to prepare for inheritance tax?

Firstly, if you didn't think about it then you certainly should which is planning to make a will. Your will shall contain all of your estate planning, in a tragic term of events which will be distributed. 

Make a will

All your listed properties will go away as you have stated in your will after your passing. Additionally, if you did not make a will then you should as there could be many hidden uncertainties in your absence. 

All your assets according to the inheritance tax regulations if you do not have a will. In this case, the ones who will receive the assets could be in direct liability as these situations are easily avoidable.

Find the value of your assets

While calculating the value of your estate can be a very specific task, it certainly comes with added difficulties. There can be assets that you may have to share with more than one person, these are a bit tough to distribute evenly. 

As for estates that are worth more than £2.3 million, you might lose the nil rate band allowances. Thus, you need to know the value of your assets to avoid such conflicts.

Know your allowance and relief of assets

Although you can gift around £3,000 each year without paying any inheritance tax. You can also give smaller gifts of £250 every year but they cannot be the same person. There is a seven year rule that will apply to gifts like these. But there is also the time period before they can count outside your assets.

Start using trusts

You can also escape from inheritance tax if you give something regarding as a gift no matter its value. To explain, you will be able to give more than 10% of your net assets to charity. 

So, your total inheritance tax will be reduced to a minimum of 36% from up to 40%. Many wealthy families do this as it is a good way of lowering your overall burden on tax.

Secure your tax liability

Many people in the UK are already trying to save for their retirement with personal or employer pension schemes. 

As this is an alternate way to invest outside of your listed estate. For example, many wealthy people have found a way to support their way of living even outside of their retirement.

As a result, your wealth will pass on to the next generation. However, they can access this wealth after the age of 55, and will not be able to withdraw before that.

Additionally, if you do decide to withdraw before it is complete, the lump sum amount will be taxable. The maximum is up to £268,275 or nearly 25% of the entire pension pot value.

How can I reduce my inheritance tax legally?

There are many ways for you to reduce inheritance tax while you have control over all of the assets. 

For some, It is the best way to reduce the overall amount when you pass away. so that your family can get more when you are not here.

Giving to charity

Now a very effective way to pass on your assets and also reduce inheritance tax is by using charities. With this in mind, now there are further restrictions on trusts that impose more taxes on the holder. Although they might not be a compelling solution, they do indeed offer some degree of reduction if conditions are met.

Start a pension plan

There are possible ways for you to protect yourself from your tax liability if you try taking life insurance. However, this is a policy that you must write into the trust as this will not be a part of your estate. Thus, this will not leave your inheriters with added taxes but rather your executors to balance on your behalf.

All of these policies are ‘Whole life’ and would pay when there is a second death for the spouses. Generally, you pay the taxes on the terms that both of them have passed away.

This method can help avoid gifting parts of your assets as ‘Gifts’ so you still have authority over your assets. Although, this may be a more expensive approach as the policies assume this as ‘Gifts’.

Thus, the assets taxes will depend on the policy itself, which will be much lower than the liabilities of the entire assets.

Get a family investment

Family Investment Company (FIC) is very helpful when it comes to planning for your inheritance tax. As the rules involving trusts have changed over the years, FIC has become a more popular choice. 

FIC can be a very subtle method to pass your assets along your the next generation. The only issue is that all companies pay tax as normal businesses under the company laws instead. In the beginning, the government may also increase the tax rates which can make this a bit complicated.

Invest in the AIM

The idea of the Alternative Investment Market (AIM) portfolio is getting business relief, this is a bit different than gifting into a trust. So, your assets will not fall under inheritance tax regulations after a certain period, which is 2 years. 

The biggest benefit is that you will still have all of your assets and still have complete access to them.

These are mostly created for elderly people, who are in the final years of their life. As you can completely take advantage of the small time period but keep in mind these products are very risky. But can take professional advice if you feel unsafe and not mindful of details.

Spend your money

Even sometimes spending your money around the nil rate bands might look like the obvious choice in some situations. However, this might not be an efficient choice for all people when thinking about their future. 

As saving for your retirement can be the most crucial planning for you and your family and it should not be ignored. Although, there are many other ways for you to minimise your inheritance tax other than losing your money.

Get expert inheritance tax planning advice

Most of financial advisors will generally charge a fixed fee for estate planning advice. Let Regulated Advice match you to a specialist financial advisor that specifically deals with inheritance tax planning advice.