Dying is one of few constants in life, and something for which we will all need to eventually plan. There is no fun in considering your mortality, or the administrative side of dividing your estate after you pass, but doing it sooner can significantly lighten the load on your family.
One key consideration when it comes to your estate is Inheritance Tax. Inheritance Tax is a marginal 40% tax rate levied on any value of your estate above £325,000. This is a significant amount, and can have consequences for your family after you die – incentivising many to consider routes to minimising their tax obligation. Here, though, an extremely important distinction needs to be made – and an extremely common myth dispelled.
Tax Planning and Legality
Firstly, there is a profound difference between tax planning and tax avoidance or even evasion. There are many legal routes to minimising your tax burden, through financial products and legal systems designed to provide relief or benefits in key scenarios. Illegal routes to reducing tax expenditure are commonly referred to as ‘tax evasion’, and ‘tax avoidance’ is used to describe legally compliant attempts to minimise tax burdens that exploit legal loopholes.
The dangerous myth that commonly circulates relates to the legality of tax avoidance against tax evasion. In reality, tax avoidance schemes are of dubious legality, and craven attempts to abuse the legal system for material benefit are not looked upon kindly by UK authorities. Tax avoidance schemes are legally grey, where shrewd tax planning is both legal and effective. But what specific routes might you take to bring down the Inheritance Tax bill levied against your estate?
Estate Planning
The broad term for what we are about to discuss is ‘estate planning’. Estate planning describes the various ways in which you might structure your estate – that is, how you handle or otherwise partition your possessions and holdings for the benefit of your family after you die. This is the umbrella practice by which you enact legal means of minimising your estate’s Inheritance Tax obligation. What, then, might your estate planning comprise?
Trusts
One of the primary ways in which an estate planner might bring down your Inheritance Tax obligation is by advising you to utilise trusts. Trusts are independent vehicles, into which you can place money or other assets. Doing this effectively removes these items from your ownership, but allows you to dictate what happens to them; this means your overall estate value is reduced.
Gifts
Gifting parts of your estate to your family before you pass is another key way to structure a compliant route to tax minimisation. Provided you die more than seven years following your gift-giving – or provided your gifts are less than £3,000 each year, your gifts do not count towards your estate.
Spousal Relief
If you leave your entire estate to a spouse, it is not taxed as it might with a diverse will and testament. This means your spouse can receive all of your assets and possessions without being taxed – and could, perhaps, carry on gifting to family in your absence.
Charity
Lastly, giving more than 10% of your estate to charity can reduce the Inheritance Tax rate for the rest of your estate – allowing you to exercise philanthropy and do right by your family in the process.
