Estate Planning in the UK – How to Minimize Inheritance Tax and Preserve Wealth

Amidst rising interest rates and high inflation figures, it has become all the more important to do estate planning. Know what is estate planning? You may have heard about will or power of attorney. Well, these are all legal documents that are necessary to create to ensure that a person’s wishes are carried out and their assets are distributed according to their intentions. So, this process of arrangement to manage and distribute a person’s assets after his death is called estate planning. Even if you are someone having a thriving business, you must lay down a sturdy foundation through an intricately crafted estate plan for your kids and loved ones. You need to think strategically to minimize the burdensome inheritance tax which is also perhaps the most unpopular tax of UK. So, let’s dive deeper to find out some proven strategies to minimize the inheritance tax and preserve your hard-earned wealth.

Understanding Inheritance Tax

Before discussing the strategies of minimizing inheritance tax, we need to understand what exactly inheritance tax (IHT) is. Inheritance tax is the tax levied on the estate of someone who is died. Here then estate can encompass property such as rental properties, land, residential property, etc. It can also include investments, savings, personal belongings, business assets (if any) etc. Currently there no IHT if the value of the estate of the deceased is below £325,000 or the deceased person has left everything more than the £325,000 threshold to his or her civil partner, spouse, any charity or a community amateur sports club. However, its standard rate is pretty much high i.e. 40% but is charged only for the part of the estate whose value is above the threshold. In the recent months, the call of abolishing this tax has gained many supporters in the UK.

Seven Strategies to Minimize IHT

1. Spousal exemption- Here, if one spouse dies, any assets transferred to the surviving spouse are exempt from inheritance tax, regardless of the value of those assets. The inheritance tax liability on the assets transferred to the surviving spouse is deferred until the death of the surviving spouse. At that time, the combined estate of both spouses is assessed for inheritance tax.

2. Business relief- Earlier popular as the Business Property Relief, this applies to certain business assets and value of an individual’s interest in a business partnership and offers either 50% or 100% on some business assets of an estate provided the assets meet certain qualifying criteria.

3. Agricultural Relief- Under this relief, it is possible to get exemptions of up to 100% on the value of eligible agricultural property, such as farms, farm cottages, pastures, farm houses. However, some conditions like usage requirements and ownership must be met. Remember, if some asset also qualifies for the business relief, agricultural relief will not apply.

4. Set up a trust- Here a trust can be set up to transfer assets to some other individuals who will be then called beneficiaries. Despite the fact that once transferred, control over the assets will be lost which means they will be not included in your estate; some sort of control over how the money can be used will be still there. Here also, the sever year rule will be applicable.

5. Potentially exempt transfers (PETs)- Gifts given to family members, civil partners, friends, qualifying charitable organizations or any other individual can be completely exempted from IHT if the person giving away these gifts does not die after seven years of making the gift. However, if the donor dies within 6 to 7 years, an inheritance tax at the rate of 8% will be applicable as the tax gradually slides due to taper’s relief.

6. Go for a life insurance- If the person having the estate goes for a life insurance policy and writes it “in trust”, it will get separated from the estate and after his or her death, and inheritance tax can be minimized. Also, it allows beneficiaries of the policy to receive a pay-out.

7. Seek Professional Advice: There are some more ways such as using pension, small gift allowances and annual exemption which is currently £3,000 worth of gifts per tax year; estate planning can be a tedious task. So, seeking professional advice from experienced tax consultants can help more to minimize IHT and preserve wealth.

Lastly, one last strategy which is not so exciting is to spend more or sell a significant part of home at a low market value. There are many possibilities and to know the best strategy is tough without expert advice.