IHT planning, or inheritance tax planning, is the process of structuring a person’s estate in such a way that minimizes the amount of inheritance tax that will be payable upon their death Inheritance tax is a levy imposed on the estate of a deceased person before it is passed on to their beneficiaries It is important to carefully plan for inheritance tax to ensure that as much of the estate as possible goes to the intended beneficiaries.
In the UK, inheritance tax is currently charged at a rate of 40% on estates exceeding £325,000 for individuals or £650,000 for married couples and civil partners This threshold is known as the nil-rate band Any amount above this threshold is subject to inheritance tax However, there are ways to reduce the amount of inheritance tax that will be payable through careful planning.
One of the most common ways to reduce inheritance tax liability is through making gifts during one’s lifetime Gifts made more than seven years before death are generally exempt from inheritance tax These gifts are known as potentially exempt transfers (PETs) However, gifts made within seven years of death may still be subject to inheritance tax on a sliding scale known as the taper relief.
It is important to keep detailed records of all gifts made during one’s lifetime to ensure that they are taken into account when calculating the inheritance tax liability Additionally, gifts to certain individuals or for certain purposes may be exempt from inheritance tax, such as gifts to a spouse or civil partner, gifts to charity, or gifts for maintenance of dependent relatives.
Another common strategy for reducing inheritance tax liability is through making use of trusts iht planning. A trust is a legal arrangement that allows a person (the settlor) to set aside assets for the benefit of one or more beneficiaries Assets held in a trust are not considered part of the settlor’s estate for inheritance tax purposes, meaning that they are not subject to inheritance tax when the settlor passes away.
There are different types of trusts that can be used for inheritance tax planning, each with its own advantages and disadvantages For example, a discretionary trust gives the trustees the discretion to decide how and when the beneficiaries will benefit from the trust assets, allowing for greater flexibility and control over the distribution of assets On the other hand, a bare trust gives the beneficiaries immediate and absolute entitlement to the trust assets upon reaching a certain age, making it a useful tool for passing on assets to younger generations.
In addition to gifts and trusts, there are other strategies that can be employed to reduce inheritance tax liability, such as taking out life insurance to cover the inheritance tax liability, investing in assets that qualify for business property relief or agricultural property relief, and making use of the residence nil-rate band, which allows for an additional tax-free threshold when passing on a main residence to direct descendants.
It is important to seek professional advice when planning for inheritance tax to ensure that the chosen strategies are appropriate for the individual’s circumstances and estates A financial advisor or estate planner can help to create a tailored plan that takes into account the individual’s assets, liabilities, and goals for passing on their estate to their beneficiaries.
In conclusion, inheritance tax planning is an essential part of estate planning to ensure that as much of the estate as possible goes to the intended beneficiaries By making use of strategies such as gifts, trusts, and exemptions, individuals can reduce their inheritance tax liability and pass on their assets in a tax-efficient manner Seek professional advice to create a tailored plan that meets your specific needs and goals for your estate Plan ahead and take control of your finances with effective inheritance tax planning