Inheritance Tax (IHT) planning is key to ensuring your loved ones keep as much of your estate as possible after you die. There are a variety of ways to mitigate against the effects of IHT and using a Will is just one of them. The simple answer is yes, you can avoid Inheritance Tax with a Will. Below we will look at some of the options available to you. Of course, IHT is only a problem if your estate exceeds £325,000.
Perhaps the most obvious way of avoiding IHT is to leave your entire estate to your spouse or civil partner. There are no IHT implications if you leave your entire estate to your spouse or civil partner, irrespective of the size of your estate. Transfers between spouses are exempt from IHT.
However, if you do take this option, you may well be building up problems for the future. If your entire estate is transferred to your spouse or civil partner, that means the value of your estate will be added to the existing value of their own property. If this happens, it is essential your spouse or civil partner carry out detailed estate planning to mitigate the impact of IHT.
It is also important to be aware that this exemption applies only to a spouse or civil partner. It does not apply to a partner with whom you are cohabiting but are neither married to nor in a civil partnership with.
There is an additional allowance available to those who wish to leave their house to their children or grandchildren. The property allowance increases the tax-free threshold (£325,000) by £175,000 giving you a total allowance of £500,000. So, if you bequeath your house to your children or grandchildren in your Will, you can potentially avoid inheritance tax to the tune of £500,000. Much, of course, will depend on the value of the house!
If you make a donation to charity in your Will, the amount of the donation will be exempt from IHT. Donating to charity reduces the level of your estate and can be used in the estate planning process to mitigate against the impact of IHT.
In addition, if you leave more than 10% of your estate over the IHT allowance, the percentage of IHT chargeable will be reduced from 40% to 36%. For example, if your total estate is £400,000, if you donate £7,500 or more to charity, your estate will enjoy the reduction in IHT chargeable.
As you might expect, planning to mitigate IHT is not restricted to your Will. There are a range of options available to you to plan for the future which will result in IHT savings when you eventually pass away.
In addition to your Will, you might consider giving away part of your estate to loved ones, making regular allowable gifts or transferring assets into a trust. Alternatively, you might take out an insurance policy designed to meet the impact of IHT on your estate.
All these options are available to you but you need to ensure they are properly thought through and compliant with the current legislation.
Partner, Peter Shand heads our Asset Protection Group and specialises in estate planning and tax. If this article has raised any questions or you would like to discuss your affairs, then please complete our contact form or call us on 0131 225 1200.
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