Inheritance Tax

Inheritance tax (IHT) is a tax that is levied on the value of an individual's estate (property, money, and possessions) when they die. In the United Kingdom, IHT is levied at a rate of 40% on the value of an estate above the threshold of £325,000. This means if you have a £1 million estate you could pay up to £270,000 in tax, on money you have already been taxed on.

Strategies to Mitigate IHT

As you may expect, there are several strategies that can be used to mitigate the impact of IHT on an individual's estate. Some of these include:

Exemptions and Reliefs

There are several exemptions and reliefs available under the IHT rules that can be used to reduce the value of an estate that is subject to tax. For example, if an individual leaves their estate to their spouse or a charity, they may be eligible for a 100% relief from IHT. This does still leave the estate open to tax upon the spouse's death, so further estate planning is required.

Giving Gifts

An individual can give away assets while they are still alive, which can reduce the value of their estate and thus the amount of IHT that will be payable. However, it is important to note that there are rules around the timing of gifts and their value, and gifts that are given within seven years of death may still be subject to IHT. Proper planning is absolutely essential to make this viable.

Trusts

Setting up a trust can be an effective way of mitigating IHT. Trusts allow an individual to transfer assets out of their estate and into a trust, where they will be held for the benefit of the beneficiaries. This can help to reduce the value of the estate and thus the amount of IHT that will be payable.

Life Insurance

Purchasing a life insurance policy with an IHT-specific rider can provide a tax-free cash sum to pay the IHT bill when the policyholder dies.

Professional Advice

It is important to note that IHT laws and rules are subject to change, so it is essential to seek professional advice when planning for IHT. An experienced professional can help you to understand the rules and to develop a strategy that is tailored to your specific circumstances. Never take a strategy off the shelf or from a few minutes of Googling; this is an intricate area that requires professional advice that will save you masses of unexpected and unnecessary tax.

Regular Reviews

It's crucial to remember that IHT planning is a long-term process, and it is important to review your plans regularly to ensure that they are still suitable for your needs. When our partners prepare an estate plan with you, they schedule regular reviews and will contact you at key times to ensure the plan is still the best one for your specific circumstances.

Conclusion

Inheritance Tax can have a significant impact on an individual's estate, but there are strategies that can be used to mitigate this impact. It is important to seek professional advice to understand the rules and develop a plan that is suitable for your specific circumstances. Contact us for a completely free consultation to get yourself on the correct path.

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