How to Avoid Paying Inheritance Tax

Jun 15, 2023 | Advice, SJB Service, Tax

How to Avoid Paying Inheritance Tax (IHT) in the UK and Your Country of Residence

Inheritance Tax (IHT) is a tax on the estate of a deceased person, which includes property, money, and possessions. In the UK, the current IHT threshold is £325,000, and anything above this amount is taxed at a rate of 40%. If you are a UK resident, this tax applies to your worldwide estate, including any property or assets held abroad. However, with careful planning, it is possible to avoid or reduce your IHT liability in both the UK and your country of residence.

Understand Your IHT Liability

The first step to avoiding IHT is to understand your potential liability in both the UK and your country of residence. Different countries have different rules and thresholds for inheritance tax, and it’s important to understand how they apply to your situation. In addition, some countries have tax treaties with the UK that may affect your IHT liability. Consulting with a tax professional can help you understand your options and obligations.

Plan Ahead

Effective IHT planning requires careful consideration and advanced planning. There are several strategies that you can use to minimize your IHT liability, such as making lifetime gifts, setting up trusts, or taking out life insurance policies. These strategies require time to implement, and it’s important to start planning as early as possible to maximize their effectiveness.

Make Lifetime Gifts

One way to reduce your IHT liability is to make lifetime gifts to your beneficiaries. In the UK, you can give up to £3,000 per year without incurring any IHT liability, and there are other gift exemptions available for specific circumstances. By making gifts during your lifetime, you can reduce the size of your estate and your potential IHT liability.

Let’s say you’re a UK resident with an estate valued at £500,000. You want to reduce your IHT liability and decide to make a lifetime gift of £50,000 to your child. This reduces the value of your estate to £450,000, and your potential IHT liability is reduced from £70,000 to £38,000.

Set Up Trusts

Setting up trusts can also be an effective strategy for reducing your IHT liability. Trusts allow you to transfer assets out of your estate while still retaining some control over them. This can be particularly useful if you have assets that are expected to appreciate in value over time, such as property or shares.

If you’re a US resident with a UK property valued at £500,000, you may be subject to both UK and US IHT. To reduce your liability, you can set up a trust to hold the property. This removes the property from your estate for IHT purposes, while still allowing you to retain some control over it.

Take Out Life Insurance Policies

Life insurance policies can also be an effective way to provide for your beneficiaries while reducing your IHT liability. By taking out a life insurance policy, you can ensure that your beneficiaries receive a tax-free lump sum payment upon your death, which can be used to pay any IHT liability.

If you’re a UK resident with an estate valued at £1 million, you could take out a life insurance policy for £500,000. This means that your beneficiaries will receive a tax-free lump sum payment of £500,000 upon your death, which can be used to pay any IHT liability. This reduces the potential IHT liability on your estate to £200,000, saving your beneficiaries £120,000 in taxes.

Many people overlook the importance of IHT planning, but failing to plan can result in significant tax bills for your beneficiaries. By taking proactive steps to minimize your liability, you can ensure that your estate is distributed according to your wishes and provide for your loved ones. Our team of experienced financial advisors can help you navigate the complex landscape of IHT planning and create a customized plan that fits your individual needs and goals.

This communication is for informational purposes only based on our understanding of current legislation and practices which are subject to change and are not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice from a professional adviser before embarking on any financial planning activity. Whilst every effort has been made to ensure the information contained in this communication is correct, we are not responsible for any errors or omissions.

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Personal advice, whenever it suits you.

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