When it comes to arranging our will, it’s natural that we would want to leave as much as possible to the ones we love. Whether that’s enough money to support them in our absence, a home for them to sell or live in as they choose, a beloved car or a piece of heirloom jewellery.
The fact is that the value of these treasured possessions can quickly add up, meaning that a portion of your lifetime assets are subjected to Inheritance Tax. If your estate exceeds the £325,000 threshold set by the UK government, then any amount over that value will be taxed at 40% unless you leave everything to your spouse or charity. Even if you intend to leave your assets to your children, the cap is £425,000 before Inheritance Tax is charged.
If you are concerned about the amount of Inheritance Tax payable on your estate, you should consult with a Financial Advisor, or a solicitor specialising in Inheritance Tax and Wills. Here are a few ways in which you can ensure your loved ones receive a gift from your estate without being excessively taxed.
Giving to… your spouse
Spouses and civil partners are exempt from Inheritance Tax, meaning that you can pass your entire estate to your partner upon your death without worrying about them getting a huge bill. Should your estate amount to less than £325,000, your surviving partner can also benefit from using the remainder of your allowance for themselves (for example, when leaving assets to your children).
If you aren’t married or within a civil partnership, then it’s likely that Inheritance Tax will be applied.
Giving to… family and friends
If you want to give a gift to a relative other than your spouse, or perhaps to your close friends, the value of that gift will only be liable for Inheritance Tax for seven years. Until seven years has elapsed it will be considered a ‘potentially exempt transfer’ (PET), and will be liable for Inheritance Tax should you pass during that time.
You can also give away up to £3,000 without having to pay Inheritance Tax, as well as giving monetary gifts to your children and grandchildren when they get married.
Keep in mind however that in some circumstances your recipients may be liable for Capital Gains Tax or Income Tax, so speak to an accountant or lawyer before making arrangements.
Giving to… the future
Putting money, investments or property into a trust can help you to reduce your estate as far as Inheritance Tax is concerned, providing that you, your spouse and any children under the age of 18 can access the trust. Perhaps you would like to set aside money for a family member’s education, or to fund care for a relative with a disability.
Depending on certain terms (for example, whether you set the fund up during your lifetime as opposed to arranging it within your will), there might be other tax implications, such as Capital Gains Tax, or Income Tax for your trustees. Before setting up the trust, speak to an expert to ensure that you are not putting your estate or family at a disadvantage.
Giving to… charity
Leaving money to a charitable initiative is an excellent way to reduce the amount of Inheritance Tax due on your estate, while supporting a worthy cause of your choice. All donations to charity are exempt from Inheritance Tax, and if you choose to donate 10% or more of your total assets then the remaining value will be subject to 36% Inheritance Tax, rather than 40%. This is still based on the total value exceeding the threshold (currently £325,000).
Depending on the value of your estate, a charitable donation can make a considerable difference to the amount that your family can receive upon your death, while also helping those less-fortunate.
What else can be given tax-free?
As mentioned earlier, you may give relatives monetary wedding gifts which are exempt from tax, providing that they are transferred prior to the wedding date and that the marriage actually goes ahead. In this manner, you can give your children up to £5,000, your grandchildren (or great-grandchildren) up to £2,500 and other relatives or friends up to £1,000.
Another option is to give regular gifts to support someone else’s living costs. For example, sending monthly payments to an ex-spouse, or putting your surplus earnings into a child’s savings account. You can also give any number of financial gifts up to £250, unless the recipient has already received your £3,000 annual tax-exempt allowance.
The rules around this can get quite complex, so again, make sure you take legal advice to ensure that these payments will be tax-exempt. You will also need to clearly keep track of these gifts to ensure that Inheritance Tax won’t be applied after your death.