Benjamin Franklin famously said, ‘In this world nothing can be said to be certain except death and taxes’. And if your estate is valued at over *£325,000, everything above this figure will be taxed at 40% when you die. Even in death there’s no relief from taxes!
However, there are certain steps you can take to mitigate the amount of tax your estate pays. By taking these measures, you can start to plan your estate to stop HMRC getting their hands on your assets before your children do.
However, before you consider giving away assets you should have your lifetime financial plan drawn up to ensure you do not run out of money yourself.
1) Give your assets away
If you live seven years beyond giving an asset away, the taxman can’t touch it and it won’t be considered part of your estate. If you die within seven years, inheritance tax will be charged on a reducing scale.
You are able to give away up to £3,000 a year inheritance tax free from your capital , as well as additional money to your children and grandchildren. However, you should keep in mind that you might have to pay Capital Gains Tax on certain assets you give away. You can also give away tax free any excess income you receive in the year.
2) Put money into a trust
As long as certain conditions are satisfied, when you put money into a trust you don’t own it any more. So for the purposes of inheritance tax, the value of assets in trusts normally won’t be counted when the bill on your estate is calculated.
An extra bonus is trusts give you a degree of control over how the assets are managed and spent. For example, you could specify that a beneficiary (say a grandchild) can only access their trust when they turn 25. Discretionary trusts also help you protect the assets for the benefit of the family in the event that a potential beneficiary becomes divorced.
It’s best to take professional advice to make sure you set up a trust correctly. .
3) Leave something to charity
When you leave money to charity, you get the added bonus of benefiting a good cause. When you leave at least 10% of your estate to charity, it will reduce the amount of inheritance tax due on the rest. The rate of inheritance tax will be reduced from 40% to 36% overall. A win win situation!. However, bequests to charities should always be expressed in your will as fixed amounts, not as a percentage of the estate. This step ensures the charities do not need to forensically examine every element of the estate to ensure they receive their correct bequest.
If leaving a bequest in a trust appeals to you please get in touch..
*An additional nil rate band of £150,000 is available when a main residence passes on death to a direct descendant.
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