Two subject matters that might well make your list of ‘stuff you don’t really want to think about’ are ‘your own mortality’, – and ‘the prospect of HMRC robbing a huge chunk of everything you own upon your passing’ (despite you having duly paid your taxes your entire working life). Failing however to plan for inheritance tax sooner rather than later (however bleak a proposition this may seem), will not only risk potentially passing on a huge tax liability to your nearest and dearest; but likely cause them a great deal of unwanted stress too. Here are 4 things you can do to avoid this unwelcome scenario…
Gift a property
One means of avoiding Inheritance Tax is by gifting a property to your child or children. If you vacate the property and live for another 7 years; there will ordinarily be no inheritance tax to pay.
Should you wish to remain living within the property post-gifting; you’ll be required to pay rent to the property’s new owner, pay a share of the bills and live there for a minimum of 7 years.
If you choose to only part-gift your property and the new owner or owners also live there; you are not required to pay rent; however, bills should be split evenly.
If you die within 7 years of giving away your property; the gift will count towards your nil-rate band, meaning that it may still be subject to Inheritance Tax.
Utilise the £325,000 threshold level
There is normally no Inheritance tax to pay in the instance where the value of your property is below £325,000. Anything above this threshold will ordinarily be taxed at 40% upon your passing.
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Leave estate to spouse
One of the simplest and most effective ways of avoiding inheritance tax is by leaving your estate to your spouse or civil partner. They won’t be liable to pay tax; regardless of amount (provided they are living in the UK).
Additionally, their tax allowance will rise by the percentage of the allowance you didn’t use.
Transfer to a trust
If you are a buy-to-let landlord; one option worth considering is transferring your property into a trust. You could, for example gift your buy-to-let property to your child – and use a trust to manage the property until the child becomes of age.
This strategy can reduce your income tax, reduce the asset value for Inheritance Tax reasons and provide the child with a future income. It’s a decision that should take considerable research and consideration on your part though; as the way HMRC will calculate and impose tax will be dependent upon the status and terms of the trust.
Give shares in a limited company
Buy-to-let landlords might want to consider passing on shares in their business to avoid Inheritance Tax (as opposed to gifting any properties).
This is often easier said than done though. Business Property Relief essentially removes Inheritance tax from a business by 50% or 100%. However, companies wholly or mainly involved in making or holding investments can’t claim this relief. To get around this, individuals in this position could steer the company into areas eligible for Business Property Relief, potentially enabling them to gift shares that will not be Inheritance Tax liable.
Pensions and Inheritance tax
It’s also worth noting that pension funds are not typically subject to Inheritance tax. There are instances however where it can and does apply. Find out more here – and get some pension-related planning strategies here.
Here to help you make the right choices
We opened our very first office in June 1989; and now proudly operate our premium management services from multiple offices in the South-East of England. Voted one of the UK’s most successful estate agencies and having won the ‘Best Agent’ award for three consecutive years in a row; you know that with Choices Estate Agency; you are in safe hands. Customer service is the heart of our business – along with honesty and integrity. Contact us today if you would like to find out more about how our expert help could be of significant benefit to you.