We have witnessed the power of inheritance in countless movies. We have seen how families fight for it after the rich, old patriarch dies on TV dramas. Intense power struggles will then ensue, creating the plot that moviegoers need. We hate to break it to you, but acquiring an inheritance is not all that it is cracked up to be. There are complicated legal technicalities (read more) but zero drama.
An inheritance pertains to any properties or assets that a deceased individual passes down to another person through a will or via the law of succession. It can come in the form of cash, real estate, jewelry, stocks, antiques, cars, and other tangible assets. But before celebrating, individuals who receive an inheritance are subjected to pay for inheritance taxes.
We all consider taxes as the bane of our existence. It is one of the few things that remain certain in this world of change. Despite that, taxes help maintain the balance of our economies. It benefits a country’s economy and its inhabitants if it is used honestly.
If you are a beneficiary, do not fret. This tax depends on many factors. Although taxes and inheritances live in a complicated world, a proper inheritance tax planning saves you from pending tax liabilities.
What is the inheritance tax?
An inheritance tax (IHT) is not a choice but an obligation. It is a tax enforced by a country or state to the person who inherits assets from a deceased individual. The tax rate depends on the current tax rule of the state or country that you live in. It also depends on the inherited asset’s value and the relationship between the beneficiary and the deceased.
There are also certain exemptions when it comes to paying your inheritance tax. For example, the tax allowance of £325,000. It means that if your inherited asset costs below £325,000, there will be no tax to be paid. But if your IHT is over the nil-rate band, the tax charge is 40 percent of anything above the standard threshold.
Working every day just to pay this much is not a life worth living. So, here are some tips to cut down your expenses.
- Gift it to your spouse, family, or friends
One way to reduce the burden of this tax is to gift it to a loved one, even if you are still alive.
Gifting inherited assets to spouses or civil partners are usually tax-free. Gifting it to your children or other relatives are also tax-free, so long as you arrange the proper legalities of it. Check it out here: https://www.which.co.uk/money/tax/inheritance-tax/inheritance-tax-thresholds-rates-and-who-pays-avrxm3k7kgxw.
It also depends on when you made the gift or transfer. In the UK, if you live longer than seven years from the time you gifted your inheritance to your relatives, your beneficiary will not pay any IHT when you die. This is called the potentially exempt transfer or PET.
But, if you die before reaching the seven-year quota, your beneficiary is liable to pay for the corresponding tax.
- Giving to charities
To encourage people to donate to charities, the government made a rule to exempt you from IHT when you leave some of it to a charitable body.
Giving 10 percent of your net estate to a charity reduces the standard tax rate of 40 percent to 36 percent. This cut is not a huge one but it can help you save thousands of money as well as thousands of lives in charities.
- Put your money into a trust
A trust is a legal fund arrangement where you give your cash, properties, and other assets to a trustee for the benefit of a third person. For example, putting some of these to a trust for your grandchildren. If they are too young to manage their own trust fund, their parents (your child) will be the one to manage it until such time that the beneficiary is of legal age.
Setting up a trust is not a surefire way to reduce the inheritance tax. There are some complications like capital gains tax that need to be considered. It is advisable to get the help of your trusted inheritance tax planning accountant or expert to navigate its rules.
- Set up a life insurance
Life insurance policies do not make a difference in the amount of IHT you are due in your lifetime. But, the insurance payout will help your family pay for the IHT bill of your estate when you die. Upon setting up your insurance policy, make sure to indicate that the policy is held in trust. This way, it will not be counted as a part of your estate.