Inheritance Tax is often called the ‘voluntary tax’ as there are so many exemptions and allowances available to reduce your tax liability. Now, the Daily Telegraph has reported that Brits pay £1.3 billion in unnecessary Inheritance Tax taxpayers due to poor inheritance tax planning, with 88 per cent of people quizzed in a recent survey saying they have done nothing to reduce the amount they will pay.
Organise your finances to avoid a large Inheritance Tax bill
The Chancellor announced in 2010 that the threshold at which people start paying Inheritance Tax will be frozen for four years at £325,000, rather than rising in line with inflation.
Karen Barrett, chief executive of consumer website unbiased.co.uk, said: “Vast sums are being paid unnecessarily in inheritance tax every year because the deceased had not made adequate provision.
“Such situations can only bring additional unwelcome stress for the deceased’s family at an already difficult time, as the tax must be paid before the estate can be released and any inheritances can be passed on.
“With the IHT threshold frozen for another three years, it is important to make sure your financial affairs are in order to protect your family and loved ones after you have gone.”
So, if you want to avoid paying Inheritance Tax, you should take steps to mitigate your liability. Here are two easy ways.
Make a Will
This is the first step toward avoiding Inheritance Tax is to make a will. Making a will can ensure that you leave all your assets to your spouse – a situation which results in no Inheritance Tax being paid.
However, if you die without a will you have no control over how your assets will be distributed. Other relatives may be entitled to a share of your assets which would mean that Inheritance Tax may then be payable.
Use the Gift Exemptions
The Inheritance Tax rules allow you to make a number of different types of gifts. The most common gifts that you can make are:
- Annual gifts – you can give away gifts worth up to £3,000 in each tax year and these gifts will be exempt from Inheritance Tax when you die. And, you can carry forward any unused part of the £3,000 exemption to the following tax year
- Small gifts – you can make small gifts up to the value of £250 to as many people as you like in any one tax year
- Potentially Exempt Transfers – any gifts you make to individuals will be exempt from Inheritance Tax as long as you live for seven years after making the gift. These sorts of gifts are known as ‘potentially exempt transfers’. Remember that if you give an asset away but keep an interest in it – for example you give your house away but continue to live in it rent-free – this gift will not be a potentially exempt transfer.