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HOW TO AVOID INHERITANCE TAX IN 2023
Below are five strategies to minimise your contribution to what many perceive as a 'double tax'
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There has been considerable discussion from the current UK government about the potential abolition of inheritance tax. Until any changes are implemented, this taxation system continues to generate significant revenues for the government. In fact, in the 2021/22 fiscal year, the government collected approximately £6.05 billion from inheritance tax.
For many people, the goal is to leave a meaningful inheritance to their beneficiaries.
Inheritance tax can substantially eat into the proceeds of this goal. This guide provides five basic strategies to protect your assets, ensuring a more prosperous outcome for your beneficiaries.
1. Spending Your Assets: This is one of the simplest and, let's be honest, most enjoyable methods to reduce your IHT liability. You've worked your entire life for these moments. Relishing the fruits of your labor while substantially decreasing the potential IHT. However, life's unpredictability means this option should not deter you from considering the following strategies and ensuring you have a plan for any eventuality.
2. Establishing a Will: Creating a will is an essential component of estate planning, enabling you to ensure your assets are allocated according to your preferences. In the absence of a will, intestacy laws determine the distribution of your assets, potentially leading to unnecessary inheritance tax (IHT) liabilities. A will is crucial not only for dictating the distribution of your estate but also for potentially minimising your IHT obligations. Remember, transfers between spouses are exempt from IHT. The easiest way to generate a will is to sign up to yoefi and start to easily log all of your assets, our AI can generate a will for you and you can continue to use our dashboard to manage all of your assets in one place.
​3. Asset Gifting: In the UK, if you give away assets and live for at least seven years afterward, these gifts are exempt from inheritance tax. However, if you pass away within seven years, the tax on these gifts decreases progressively. Annually, you're allowed to make gifts up to £3,000 without incurring any IHT. Additionally, a one-time gift of £5,000 can be made for a child's wedding, free from IHT.​ Assign your beneficiaries with yoefi.
4. Donations to Charity: Estates leaving at least 10% to charity may qualify for a reduced IHT rate of 36%.
5. Maintaining Below the IHT Threshold: For 2022/23, the individual IHT threshold is £325,000. Couples can combine their thresholds, potentially allowing a £1 million transfer free of IHT. Centralise your family finances with yoefi.
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What is inheritance tax?
Inheritance Tax (IHT) in the UK is a tax paid on the estate (property, money, and possessions) of someone who has died. Here's a brief overview of the key rules:
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Tax Rate: The standard IHT rate is 40%.
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Nil-rate Band: Each individual has a £325,000 nil-rate band. Estates valued below this threshold are exempt from IHT.
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Transferability: The nil-rate band can be transferred to a surviving spouse or civil partner, effectively doubling the exemption to £650,000 for married couples and civil partners.
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Main Residence Allowance: An additional allowance is available when passing on a home to direct descendants. This is £175,000 per person, potentially increasing the total tax-free allowance to £500,000 per individual, or £1 million for a couple.
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Gifts: Gifts given more than seven years before death are generally exempt from IHT. There are also allowances for smaller gifts and gifts made on occasions like weddings.
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Spouses and Civil Partners: Transfers between spouses or civil partners domiciled in the UK are exempt from IHT, regardless of value.
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Charitable Donations: Estates leaving at least 10% to charity may qualify for a reduced IHT rate of 36%.
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Trusts and Life Insurance: Certain trusts and life insurance policies can be used to mitigate IHT liabilities.