Inheritance tax is charged on the value of your wealth and assets after you die if they meet the minimum threshold of £325,000. This means that the estate you are leaving to your loved ones could be liable to a tax rate of 40% which could reduce their inheritance significantly.
However, there are ways to minimise the amount of tax your family will have to sacrifice. With the right guidance, you can protect your wealth to ensure that as much as possible is passed down to your beneficiaries. What are the most common legal methods of doing this?
Seek professional advice
Firstly, it’s worth mentioning that seeking financial advice is perfectly legal and can help to make the distribution of your wealth as tax-efficient as possible. It’s not just for the rich and famous, anyone can consult specialists if they have a large enough estate to pass down.
Financial planners are highly skilled when it comes to managing the estate planning process and finding tax-efficient routes for distribution after you pass away. They will also understand the legal definitions and what isn’t allowed so you can rest assured that your family aren’t going to run into complications.
Gift while you’re alive
One of the most often overlooked ways to minimise inheritance tax is to gift more while you’re alive. This helps to lower the value of your estate after you pass away and allows you to see the impacts of your wealth on the lives of your loved ones.
Living inheritances are becoming increasingly popular to help minimise tax deductions. Although you must be aware of the regulations surrounding the seven-year rule – if you die at least seven years after you make a gift, then it’s not tax liable. If you die between 0-7 years after you make the gift, it may be liable depending on how much time has passed.
Establish a trust
Trusts are an option to reduce your taxable assets by passing them over to a separate legal entity, which won’t be included in your estate when you die. This arrangement helps to minimise tax liabilities and protect assets with the beneficiary in mind.
Some people set up trusts to preserve their inheritance for their children until they come of age, at which point, they may not be liable to sacrifice any to inheritance tax. There are different types of trusts, so you should work with experienced professionals who can guide you through the process.
Use your tax-exempt allowances
Maximising your tax-exempt allowances is crucial to minimising inheritance tax. The first £325,000 worth of your assets is tax-free when being passed down to your beneficiaries. You can use exemptions to minimise your tax liability through methods such as gifts to spouses, wedding gifts and charitable donations.
Many don’t know that if you leave your estate to your spouse, they take on your tax-free allowance giving them a total of £650,000 to pass on before anything can be taxed.
These are some of the most common legal avenues to minimising assets liable to inheritance tax. Seeking advice from a professional financial planner can help to make sense of this often confusing process and maximise the inheritance your loved ones will receive.