Inheritance tax (IHT) may be assessed if your estate is sizable enough after you pass away. However, there are ways to decrease your estate’s tax burden and raise the tax-free amount that is passed on to your heirs.
But before knowing those ways you should know who pays inheritance tax in the UK. The executor of the will, if there is one, is often the one who makes arrangements to pay the inheritance tax. In the absence of a will, this is the responsibility of the estate administrator. The monies in the estate or the proceeds from the sale of the assets may be used to pay IHT.
Here are some options for reducing inheritance tax……..
Contribute To A Charity
If a charity is registered in the UK, any funds you leave to it will never be subject to inheritance tax. The same holds true for donations made to political parties or regional sports leagues. So, give value to this option when doing inheritance tax planning UK.
Additionally, the inheritance tax rate for the remaining portion of your estate will decrease from 40% to 36%. If you give more than 10% of your taxable estate to one of these groups in your will.
Only the portion of your estate that exceeds the IHT allowance is applied to the 10%. For instance, if you were to leave behind £425,000. You would gain from the reduced rate if you gave in charity, more than £10,000 (10% of the amount exceeding £325,000).
Give Estate To Your Spouse
No matter how much you leave in assets, your spouse or civil partner will never be required to pay taxes on those assets. Making full use of this option for inheritance tax planning UK, in your will can help your family save a fair amount of money. Your unused IHT allowance will have been passed on to your spouse by that point. Giving them the possibility to transfer up to £650,000 tax-free.
Unused personal allowances can be clubbed and transferred if they (or you) have remarried. But only to the equivalent of one full personal allowance or a maximum increase of £325,000.
Leveraging Property Allowances
In the current 2022–2023 tax year, property allowances will raise your tax-free level by £175,000 (or a total of £500,000), regardless of who pays inheritance tax in the UK. If you leave your home to your children or grandkids through your will.If a married couple leaves their home to their children or grandkids along with their combined allowance. They can pass on assets worth up to £1,000,000 fully IHT-free.
Think About Equity Release
You might not be able to use gifts during your lifetime or spend your fortune on yourself. If all of your wealth is tied up in your property. Some people use equity release schemes as one of the ways to avoid inheritance tax, to get around this.
It’s crucial to keep in mind that all this actually does is decrease the assets you own. And increase the debts that will be considered part of your estate. Giving away assets early is probably better for you if you don’t need to access the cash they contain.
With these schemes, you can either take out a loan against the value of your house (a lifelong mortgage). Or sell a portion of it for less than market value. While continuing to live there the rest of your life (a home reversion scheme). You can either spend the money you release or leave it to your heirs. There won’t be any IHT to pay if you survive any gifts by seven years.
In this post, you learned about the basic ways to avoid inheritance tax. Make full use of these options to make your tax planning efficient