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Tips To Avoid Inheritance Tax – Part 2

2nd December 2019

Tips To Avoid Inheritance Tax – Part 2

Tips To Avoid Inheritance Tax

In Part 1 of this article, I mentioned some initial ways in which you can – entirely legally – avoid a large inheritance bill on your estate. The first tip was to reduce the value of your estate below £325,000, so that it is below the limit for paying tax. The second was to give away small amounts of capital in your lifetime, and the third was to give gifts so someone getting married. Here are some more tips, including how you can give away a million-pound estate entirely tax-free!

Write pension benefits into trust

This is a really important tax-planning strategy. If you have a pension fund, when you die the balance of the fund will usually be paid to your estate. It will form part of the value of the estate for calculating inheritance tax – so 40% of it could be paid to the taxman, rather than going to the beneficiaries under your will.

The way to avoid this is to ‘write it into trust’, so that the fund is paid out to specified persons (such as your spouse or children), rather than to the estate.

Choose your beneficiaries carefully

There is no inheritance tax to pay on gifts left to your spouse or civil partner, or on a gift to a registered charity. So if you leave your entire estate to your spouse – or the cats home – the tax bill will be nil.

What’s more leaving even part of your estate to charity can result in a lower tax bill: if 10% or more of your estate is left to charity, then the tax rate on your entire estate is reduced, from 40% to 36%.

Leave your house to your children

In Part 1, I referred to the lower limit for tax to be applied on estates: if an estate is worth less than £325,000 then no tax is payable. But if you make a gift of the family home to your children (or grandchildren), an additional band comes into play: a further £150,000 in the 2019-20 tax year, and £175,000 in the 2020-21 tax year. Even better, spouses and civil partners can use each other’s ‘tax-free’ bands.

It works like this. Let’s say Mr X’s house is worth £995,000. His wife died a few years before him and left everything to him. She thus did not use her tax-free bands (because there was no tax to pay on her gifts to Mr X). Mr X is therefore able to use both his and his wife’s tax-free bands. If he dies in the 2020-21 tax year, the bands will be worth 2 x £325,000 + 2 x £175,000, a total of £1,000,000. If he leaves his house worth £995,000 to his children, it will be within the limit, and there will be no tax to pay.

Note

To find out more about tax and estate planning, click here.