Estate tax stays the same in the fall budget – here’s how to avoid paying it

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No changes were made to the UK Inheritance Tax (IHT) in the recent Autumn Budget. But that doesn’t mean things won’t change in the future.

Now you have more time to plan and think about this tax, which is great because time is one of the best ways to minimize the impact it can have. I’ll explain why this is the case and how you can lower your bill or avoid paying anything!

How the IHT works

The IHT is a tax on your estate (whatever you own) upon your death.

It is sometimes referred to as the ‘death tax’ and is one of the most hated forms of tax in the UK. The standard rate of the IHT is 40%, so this is not a symbolic gesture.

Due to the morbid nature of this tax, many people choose to ignore it. However, it could be a costly mistake, not only for you, but for your entire family.

Ways to Avoid and Minimize IHT

It was a tight call, but IHT didn’t increase in the fall budget. So there is even more reason to take control now before any future increases. Here’s how you can pay less IHT, or in some cases not at all.

1. Use your zero rate bracket

This is the most obvious advice, but you may not be aware of your zero rate IHT allowance.

You will have your own threshold of £ 325,000. Anything below this threshold is not subject to the IHT. There is also the possibility of passing on your threshold any unused amount if you are married or in a civil partnership.

2. Use RNRB when walking through a house

The absence of a change in the fall budget means that there is still a zero resident rate bracket (RNRB) you may be entitled to. This gives you up to an additional £ 175,000 where no tax is due if you transfer your primary residence.

If you give your house to a husband, wife, or civil partner, they don’t pay the IHT. You can also pass on any unused allowance to them. This means that you can combine your threshold allowances to eventually pass the family home on to your children or grandchildren.

So a couple could pass on up to £ 1,000,000 in property and assets and pay no tax.

3. Explore life insurance policies

Another option is to use a life insurance policy to cover your IHT bill.

If the policy is written in trust, it will not be under your estate for tax purposes. This way, when you die, the policy proceeds can be used to pay the tax bill instead of withdrawing money from your estate.

Organization can be complex. So it’s always worth seeking financial advice to make sure this legal process goes smoothly.

4. Give gifts

Each year you can give freebies up to £ 3,000. Doing this while you are still alive will reduce the overall value of your estate and the result will be paying less taxes because your estate will be smaller.

You can also give small gifts and wedding gifts ranging from £ 250 to £ 5,000.

5. Learn about potentially exempt transfers

This is where the extra time due to not changing the fall budget could really benefit you.

You can donate any amount that will not fall under your estate until you die within seven years.

Things get a bit tricky if you die within this time frame. Indeed, the tax would apply according to a degressive system, depending on the time of death.

6. Investigate retirement options

Most people don’t know this, so count yourself lucky!

Depending on the type of pension you have, you may be able to pass it on tax-free. Unfortunately, it works more simply if you die before the age of 75. Otherwise, your beneficiaries may have to pay income tax on the money they withdraw.

This is a major benefit of saving in a Self-Invested Personal Pension (SIPP) over an ISA. This is because an ISA would count as part of your estate, but not a SIPP. A SIPP can also include other assets, such as business property, that would normally count towards your estate.

7. Donate to charity

When you hear about people donating to charity on their deathbed, it’s not completely altruistic.

In the UK, if you donate 10% of your estate to charity upon your death, you will actually benefit from a reduced IHT rate of 36% on the rest of your assets!

Please note that the tax treatment depends on your personal situation and may be subject to change in the future. The content of this article is provided for informational purposes only. It is not intended to be, nor does it constitute, any form of tax advice. Readers are responsible for performing their own due diligence and obtaining professional advice before making any investment decisions.

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