Inheritance Tax and Mitigation Strategies for UK Taxpayers
Inheritance Tax (IHT) in the UK can be a significant consideration when planning your estate. It’s charged on the value of your estate (property, money, and possessions) when you pass away, if it exceeds the current IHT threshold.
- The standard IHT rate is 40%.
- It applies to the value of your estate above the £325,000 threshold.
- Transfers between spouses or civil partners are usually exempt.
Effective Mitigation Strategies
- Gift Allowances: Utilise your annual gift allowance of £3,000 and consider make gifts of excess income.
- Potentially Exempt Transfers (PETs): Gifts made more than seven years before your death are usually exempt from IHT.
- Trusts: Place assets into a trust to potentially reduce the IHT liability. If done 7 years before death it won’t affect your £325,000 threshold.
- Life Insurance Policies: Use life insurance to cover potential IHT liabilities, ensuring the policy is written in trust to your beneficiaries.
- Charitable Donations: Leaving at least 10% of your estate to charity can reduce the IHT rate on the rest of your estate from 40% to 36%.
- The Residential Nil Rate Band (RNRB): The RNRB is a complex allowance but can grant you £175,000 increase in your IHT threshold if you pass your home to your children or grandchildren in your Will. However, for those with an estate over £2 million there is a clawback, and so extra financial planning is required.
- Business Relief: Business assets may qualify for relief from IHT. The good news is that you don’t need to start a business to claim it – AIM shares and other unlisted investments can be bought and offer an exemption to IHT after just 2 years of ownership.
- Pension Funds: Most personal pensions and SIPPs can pass to your estate beneficiaries free of IHT, but it is vital to nominate your beneficiaries correctly or you could cause them extra tax headaches.
Professional Financial Advice:
Estate planning before you get too old is key. Consider speaking with a financial advisor to explore these strategies in detail and tailor them to your unique situation.
For expert guidance on mitigating inheritance tax and protecting your legacy, reach out to our team. We’re dedicated to helping you navigate these complex matters with personalized solutions.
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