Tax is an issue that anyone who is earning reasonable amounts of money has to think about. Understandably though, people tend to focus most of their thoughts on the tax that they will have to pay while they are alive.
That is partly down to the fact that dying is not something anyone wants to dwell on. While the old saying about death and taxes being the only two certain things in life may not be entirely true, you can still be liable for tax even after you die.
Or to be more accurate, your estate can be. That is where inheritance tax comes in, because it is the bill that your family can be left to pay after you are gone.
What is inheritance tax?
Inheritance tax is a form of taxation that is charged on the estate that a person leaves after they die. The term ‘estate’ just means what that person owned and can include things like properties, jewellery, businesses and anything else of significant value. Not every estate is charged with inheritance tax as there is a threshold below which it does not apply that is currently set at £325,000.
The standard rate that inheritance tax is calculated at for those who leave an estate worth that sum or more is 40%. That will have to be paid by those the estate is left to – which means the family of the deceased in most cases. It can be a sizeable amount and will greatly reduce what your family is able to inherit, but that does not have to be the case. Some people refer to inheritance tax as voluntary – not because you can skip paying it, but because there are a lot of options for cutting it down to the bare minimum.
Read on to find out what you can do to reduce the impact of it in that way.
Save into a pension
Eight years ago, the Government brought in pension freedoms that can make saving into one a very good way of reducing the amount of your estate that is claimed in inheritance tax. These freedoms mean that, should your death come after the age of 75, your family will only have to pay marginal rate tax on any withdrawals from the pension pot. On the other hand, if your death occurs before the age of 75, they can receive the entire pension in the form of a lump sum that is totally tax free.
Under the current rules, any money that has been put aside as a pension will not be classed as part of your estate after death and will not typically be part of any inheritance tax bill. Therefore, saving as much of your earnings into a pension is a good way to reduce this tax liability.
Gift money to your family
Another very effective method of cutting any inheritance tax bill in the future is to gift money from your estate to your family members now. That is because there is a gifting allowance included as part of the legal inheritance tax rules. A maximum of £3000 can be given as gifts per year without incurring tax, while a further £250 can be given as small gifts, as long as it is not to the same people.
This does not have to take the form of just giving away money. Instead, you can use the allowances to help your family with things that they need. For example, money towards a house or a car. Aside from cutting the inheritance tax bill, this also lets you see your family benefit from the estate while you are still alive.
Create a will
Another estate planning step that any financial advisor in Shropshire or wherever you live would advise is to get a will made up. That will enable you to establish in black and white how you wish your assets to be divided up, favouring methods that reduce inheritance tax. For instance, if you are legally married, you can leave the entire estate to your spouse as that usually ensures that no inheritance tax has to be paid on it.
Take out life assurance
The main difference between a life insurance policy and a life assurance one is that the former covers a set term while the latter will usually cover the person taking out the policy for the remainder of his or her life. Getting life assurance is a good idea if you are not sure what your estate value is likely to be in the future as it can be used to pay any inheritance tax when the time comes.
It must be written in trust though to make sure that the payment is classed as being outside of your main estate for the purposes of inheritance tax.
Contact an experienced wealth manager for unbiased advice about inheritance tax mitigation.