As you start to move towards old age, there’s a good chance that you will start to think about passing on your money or property. You may want to leave it to your children or grandchildren when the time comes.
However, there is one fly in the ointment when it comes to this process – inheritance tax. Anyone seeking financial advice in this area has the right idea. As the best financial advisors will confirm, a large inheritance tax bill can reduce the amount of money that your loved ones receive compared to what you had to pass on.
What is inheritance tax, and how on Earth does it work? Inheritance tax is a tax that the government applies to the estate that you leave and pass on to your family. Here are a few pointers on how it works currently:
- Inheritance tax is only payable on any estates totalling more than £325,000.
- If your estate is above that threshold, then a tax is payable on it at a rate of 40%.
- Other areas within inheritance tax cover gifting items to people or setting up trusts.
As you can see, inheritance tax is quite a complex area, which is why getting clear financial advice on it is key.
How Can I Reduce My Inheritance Tax Bill?
If you are worried that you may end up passing on an estate that comes with a 40% inheritance tax rate, then you could try the below to help reduce this cost:
- Make a will – Making a will that clearly outlines who gets what can help you divide your estate in such a way that you reduce or avoid inheritance tax. Without a will, legal regulations will divide your estate up for you, which could cost more.
- Give your assets away – This falls under Gifting regulations. If you give your money or items away to someone and survive for seven years after, then this reduces the inheritance tax on what you gift.
- Let life insurance cover it – One neat tip is to set up a life insurance policy that is of enough cover to meet the inheritance tax costs that you expect. If you put the life insurance policy in trust, then this money can pay the tax bill.
- Leave some of your estate to charity – Not only is this a nice gesture, but it also will save your relatives money on the tax bill. If you leave 10% of your estate to charity, the inheritance tax rate on the rest goes down to 36%.
- Set up a trust – For example, set up a trust fund for your grandchildren’s university education that they can’t access until they’re 18. This will be free from inheritance tax.
If you are looking to cut any inheritance tax costs that you fear might affect your estate, then the above tips can certainly help. Of course, you may simply decide to enjoy the money yourself and go for that holiday of a lifetime! Although this may not leave much left for your family, it will help eliminate the dreaded inheritance tax and put a spring in your step. If you have any questions, contact us and we’ll be happy to assist.