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Effective Ways To Pay Less Inheritance Tax 

In recent years the economy has been rocked. The financial crisis of 2008 was followed by a global economic crisis in 2016, then a global pandemic and the hits kept coming. The latest problems directly affect householders: the energy crisis is directly linked to the Russian-Ukraine war, it’s decimating the incomes of ordinary people

With all this happening it may seem surprising that more people are going to be affected by inheritance tax. But, the truth is the property market continues to do well and, on paper, many people have enough assets to qualify for inheritance tax.

That’s why you need to find ways to pay less inheritance tax, or even how to avoid inheritance tax altogether. 

Effective Ways To Pay Less Inheritance Tax 

How Inheritance Tax Works

The government need to generate funds, these are used to pay for everything that is necessary to keep a country running, from building roads to funding education, and so on. 

Of course, there are many different taxes that help the government get the funds they need, such as VAT and income tax. Inheritance tax is simply another way of increasing the government’s funds. 

The tax is set at 40% but it only applies above a certain threshold. You need to have assets in excess of £325,000. With the average UK house price now £277,000, it’s only a matter of 2-3 years before the average price lifts you over the inheritance tax threshold.

You only pay tax on the amount above this threshold. So, if your estate is worth £400,000 you only pay inheritance tax on £75,000. However, at 40% it’s still an impressive £30,000 charge.

In short, it’s essential to find ways to pay less inheritance tax or even discover how to avoid inheritance tax altogether.

Effective Ways To Pay Less Inheritance Tax 
Credit: Photo by Nataliya Vaitkevich

Use Your Spouse’s Allowance

A clever trick of how inheritance tax works is that your allowance can be transferred to a spouse. So, if one half of the couple dies and doesn’t use their inheritance tax allowance, the surviving spouse can take the unused amount, potentially doubling their inheritance tax threshold to £650,000.

It should be noted that one spouse can leave their house to the other at the time of death without any obligation to pay inheritance tax. 


The 7-Year Rule

The UK also has a law that allows you to gift funds or property to others. Providing you stay alive for at least seven years after the gift there will be no inheritance tax due. 

However, that doesn’t mean you can gift the house and still live there. As you will still have all the benefits the government will see the transfer as happening on your death and the inheritance tax will still be due. 


Giving To Charity

This doesn’t exempt you from inheritance tax but can save your family some money. By giving at least 10% of your estate to charity when you die, the inheritance tax rate will drop from 40% to 36%.

It can help. The same estate mentioned early, valued at £400,000 would give £40,000 to charity, making the estate worth £360,000, just £35,000 over the threshold. Forty percent of this is £14,000, a saving of £16,000.

The overall estate available to your children is less. But, the reduced rate of inheritance tax means your children may be able to afford to pay the tax without losing the house. 

That is, after all, one of the biggest issues with inheritance tax, you have to sell the house to pay it. 


Take Out Life Insurance

Life insurance won’t reduce the amount of inheritance tax owed. But, a policy that pays out on your death could equal the amount of inheritance tax due, allowing you to effectively give all your estate to loved ones. 


Agricultural Relief

If you have woods attached to your property or agricultural land you can apply for agricultural relief. This can negate the amount of tax due or at least reduce it. You will need specialist help to make sure you get this right. 


Spend It!

By spending any income you have over the threshold and downsizing your property, you can potentially bring the value of your estate to less than the inheritance tax threshold. This is getting more difficult and prevents you from leaving any more than £325,000 behind. But, it is an option. 


Use A Trust

You can place your house or specific funds in a trust and, because the assets are owned by the trust, not you, no inheritance tax will be due. 

There are rules and if you need the income from the assets you’ll want an ‘interest in possession trust’. Again, speaking to an expert s advised. 

The good news is, that with a little planning, you can reduce or even eliminate your inheritance tax liability. All you have to do is start planning today. 

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