At some point in your life, it’s likely you’ll be in receipt of inheritance or will want someone to have an inheritance from you.
This is usually in the form of assets, such as property or money, that are transferred to another individual immediately before or after someone else’s death.
If that happens, it’s likely you’ll need to understand inheritance tax, which is a tax applied to money, property or possessions that are obtained as a gift or inherited.
Inheritance tax is usually applied when the total value of an estate is above a certain threshold, currently £325,000 in the UK. Assets valued at above that figure are taxed at 40 per cent, which of course reduces what a nominated person receives.
Thankfully, for those people who understandably want their assets to go to their loved ones, inheritance tax loopholes in the UK do exist.
Load pension with cash
One way to avoid paying inheritance tax is to put your money in a pension. The maximum amount of money you can put in a pension is usually a million pounds. It’s also possible to pass on any money saved in your pension within this limit, free from inheritance tax.
The process of doing so is straightforward and simply requires you to fill out a beneficiary nomination form and include it within your will.
If you have other means of earning money, there is the option to leave your pension pot alone and spend your non-pension income when you reach retiring age.
You can also put money into a family member’s pension and they will still be able to keep their pension allowance of 100 per cent of their earnings, or £3,600 if they have none.
This means that if their total pension contribution falls below the allowance, any amount can be donated. The person who holds the pension will then be able to claim a 20 per cent tax rebate and may be eligible to claim the left-over tax through a self-assessment tax return.
Write a will
Writing a will enables you to choose who receives what from your estate and can help reduce any inheritance tax liabilities.
If you pass away without writing a will, government legislation will dictate your assets’ distribution.
Planning in advance by writing a will is also a good way to get the correct legal advice with regards to tax inheritance and it can ensure that your assets are going to the right place.
Deed of variation
A deed of variation is a type of legal document that permits the beneficiaries of a will to change their entitlement under the will.
It can be used as a tax loophole as it operates by preventing the beneficiaries from going over the inheritance tax threshold.
As the will can be changed, the beneficiaries can opt out of receiving their share of an estate. Instead, this inherited amount can be transferred to someone else, such as offspring.
This inherited gift is most used in circumstances where the beneficiaries want their children to benefit instead of themselves, and the gift will be treated as though it were made by the deceased.
Downsize and donate the cash
Another common tax loophole is to downsize your property.
As inheritance tax only comes into effect at the time of someone’s death, taking into account assets that have been given away in the seven years prior to death, it can be a good idea to downsize to a smaller property.
Whatever is remaining once the larger property is sold can then be transferred to whoever you have selected as your beneficiaries. If you are considering this tax loophole, remember that if you pass away within seven years of this donation, you will still need to pay inheritance tax, so the timing will need to be considered.
This loophole does not just apply to property, but also to business shares or second homes that are responsible for generating another income stream. This means that you can still donate a larger sum of money to your beneficiaries without incurring a hefty tax fee.
However, it’s worth keeping in mind that there may be other non-inheritance tax related fees to grapple with if you are deciding to go down this path. This may be in the form of capital gains tax on the sale of your investments.
If you are seeking some piece of mind when it comes to inheritance tax, it’s worth turning to Wafer Phillips Solicitors.
Whether it is giving advice to you on inheritance tax or helping you to make preparations when it comes to your estate or assets, we are here to help.
We have years of experience helping people who want to plan their estate and helping you to give your hard-earned assets to the people you love.
As a firm that offers quality services relating to wills and probate, including dealing with inheritance tax, we can assist you in giving you an overview of your inheritance tax situation and your available options.
We can help with the probate process, which involves applying for a ‘grant of representation’ to authorise you to sort out the deceased’s estate, gather their assets, pay their debts, and then distribute their estate.
We can also assist in managing the deceased’s estate, which includes belongings, money, and property as well as giving you legal guidance on what happens when probate is not obtained and there is no will.
We believe it is always a good idea to consult with a legal professional when dealing with matters related to inheritance tax and estate planning, and can provide personalised advice based on your specific circumstances.