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Let’s talk about: Inheritance Tax

Most of us would prefer that our loved ones receive our wealth when we die, rather than the taxman. But with property becoming more valuable, more people than ever are becoming liable for inheritance tax.

At Cardens, we can help you to work out what your inheritance tax liability would be if the worst were to happen tomorrow. From here, we can look at the ways that you can potentially avoid or reduce inheritance tax.

about inheritance tax

What is Inheritance Tax?

Many of us are only vaguely aware of Inheritance Tax, or IHT. We may think that it only affects the landed gentry, and that we are never called on to pay it.

IHT is levied on the value of your estate when you pass. Your estate will include your property, savings, investments, and possessions (car, artwork etc). It is easy to think it does not concern us but the threshold for Inheritance Tax is just £325,000, so it is very easy to breach that threshold given average house prices in the UK. True, we don’t pay it ourselves, but it can take a big chunk out of what our loved ones receive.

Are you liable for IHT?

Are you uncertain if you will be liable for IHT? Book a free consultation with our tax team.

The Treasury is collecting more IHT receipts than ever, with latest data from April to August this year standing at £2.7bn – £0.7bn higher than the same period a year earlier

Without the correct precautions, the taxman can help himself to 40% of everything above the threshold, leaving your loved ones worse off.

Fortunately, there are ways to reduce an IHT liability, or even avoid it altogether. It is possible to avoid or reduce IHT, but you will need to take the right steps to do so.

Try our free inheritance tax calculator

Give it away

One way to reduce IHT is to pass on your wealth while you are still alive. Everyone has an an annual exemption, which allows them to gift up to £3,000 cash away each year free of tax.

If you want to give away more, you can. Any cash gift will be classified as a Potentially Exempt Transfer (PET) which broadly means it will be free of IHT as long as you survive the gift by seven years.

There are some other ways to give. Many people will want to help their children and grandchildren especially if they are struggling to get on the housing ladder. A cash lump sum might be subject to the seven years rule, but you could look at helping them with their regular mortgage payments. If set up correctly as gifts on a regular basis, genuinely out of surplus income they can be exempt from IHT immediately.

If you are giving the wealth now, rather than waiting until you have no further need of it, the key thing is to keep enough cash back for your own needs, which could include care.

Insure against it

The idea of insuring against tax seems odd, but this is possible. Taking out a whole of life insurance policy could mean a large sum is payable on your death. With a little forward planning, you may be able to arrange this lump sum to cover the IHT liability. The taxman may then be paid off by your executors and your beneficiaries may receive your estate intact.

Of course, you don’t want the taxman simply to take a share of the pay out as part of your estate. Many insurance policies are automatically written into trust, meaning the money paid out is ring fenced and falls outside of your estate when IHT is calculated.

Trust to the future

You could also keep your wealth out of reach of the taxman by putting it into trust.

A trust is a legal arrangement where you give cash, property, or investments to someone else (Trustees – which could be you) so they can look after them for the benefit of a third person (most likely children or grandchildren).

Trusts come in various guises and are subject to tax in their own right on income, capital gains and potentially IHT, but they can be a great solution in certain circumstances. One of the main benefits of a Trust is that it ensures your wealth remains for the benefits of your intended recipients. Unlike a cash gift, if your loved ones were to get divorced, the ex-spouse would not have a call on the assets held on trust for your beneficiaries.

At Cardens we can help you see if a Trust (or Trusts) is a solution that might work for you.

Count On Cardens

Tailored succession planning enables a smooth transition of your wealth to the next generation as well as minimising tax liabilities.

To discuss creating a tailored plan for you, please get in touch with your usual Cardens team or contact us at 01273 739592

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