Inheritance tax has been voted one of the most unpopular taxes in Britain – beating even Council Tax into a distant second place – but with a little forward planning you can not only reduce the inheritance tax bill you leave your loved ones, you may even be able to eradicate it completely. Better still, it is perfectly legal to do so.
So, here are seven ways you can cut your inheritance tax bill before the new higher threshold comes into force for couples in 2017:
1. Write a will
Sounds obvious, but you would be surprised at just how many people die without a will – or intestate as it is technically known – and you cannot expect your loved ones to inherit your estate as you wish without one. Almost half of us die without a will, according to research from Will Aid, and the Treasury gets millions of pounds in revenue as a result. The common misconception is that even without a will, your loved ones will share your estate as you would have wanted, but this is not the case.
Dying without a will sets a chain of events in motion that allows the Government to specify who gets what from your estate, and ultimately can lead to the Treasury taking a share. This will all be happening at the worst possible time for your family too, as they face untangling a financial mess at the very time they are mourning your loss.
2. Keep your will up to date
This is good advice whether you are looking to reduce your inheritance tax bill or not. Each time something significant in your life changes – getting married, divorced, having children, inheriting some money, winning the lottery – you should update your will to reflect the change. Dying without an up-to-date will could result in your wishes not being carried out, fighting between relatives, and your estate being whittled away in lawyers’ fees. Who wants that as a legacy?
3. Make a list of all your assets and how much they are worth today
It may sound tedious, but this could be one of the most important 30 mins you spend helping your family. Think of every asset you have including your home, any other property you have, cars, antiques, paintings, savings, investments, insurance policies that will pay out when you die, and also consider any money that you may inherit in the future as this could impact on the value of your estate. You should also include any debts you have, such as mortgages on property, outstanding credit agreements or credit card debt. The chances are you will be surprised at how much you actually have in your estate when you tot it up.
4. Get some advice on your options
Trying to ‘go it alone’ when it comes to IHT is a big mistake. Even writing your own will could lead to it being invalidated, leaving you dying intestate and letting the State decide who should get what from your lifelong assets. But using an expert to help you set up your will and your assets in the most tax-efficient way could save your family hundreds of thousands of pounds in tax, and leave them even more financially secure. We have partnered with Savings Champion to offer you a free IHT guide if you have more than £250,000 in investable assets. You can download the free IHT Guide here.
5. Write any life insurance policy into trust
Taking out life insurance is one way that many people look to protect their family after they have gone, but leaving that to become part of your estate could mean at least some of that money goes to the taxman rather than your family. By writing the policy into trust – which many insurance companies will do either for free or at a very low cost – you legitimately take that out of your estate for inheritance tax purposes because the policy is paid out directly to the beneficiaries rather than to your estate. Again, you should get advice before you do this.
6. Make gifts from your disposable income
If you choose to give money away before you die from your disposable income, then it should not be considered within your estate for inheritance tax purposes providing that making these regular gifts does not impact on your normal standard of living.
7. Make a gift that you survive by seven years
If you make a substantial gift to someone, then providing you survive that gift by seven years it will be considered to be outside of your estate for IHT purposes. If you survive it by less than three years, then it would still be considered part of your estate, and there is a scaled reduction in the IHT due if you died anything between four years and seven years after the gift was made. You can find more information in the free IHT Guide.