Inheritance tax (IHT) is a tax that is levied on the estate of a deceased person before it is passed on to their beneficiaries It is a complex area of taxation that many people find overwhelming and confusing However, with some planning and the use of trusts, it is possible to mitigate the impact of IHT on your estate.
IHT is charged on the value of the deceased person’s estate above a certain threshold, known as the nil-rate band For the 2021/22 tax year, this threshold is set at £325,000 Anything above this threshold is taxed at a rate of 40% However, there are ways to reduce the amount of IHT that is payable on an estate.
One of the most commonly used methods of reducing IHT is through the use of trusts A trust is a legal arrangement where assets are held by trustees on behalf of beneficiaries By placing assets in a trust, they are no longer considered part of the settlor’s estate for IHT purposes This means that any assets held in a trust are not subject to IHT when the settlor passes away.
There are various types of trusts that can be used to reduce the impact of IHT on an estate One common type of trust is a discretionary trust, where the trustees have discretion over how the assets are distributed to the beneficiaries By placing assets in a discretionary trust, the settlor can ensure that their beneficiaries receive the benefits of the assets without having to pay IHT.
Another type of trust that is commonly used to mitigate IHT is a life interest trust iht and trusts. In a life interest trust, the beneficiary has the right to income from the trust assets for their lifetime, with the capital going to other beneficiaries upon their death By placing assets in a life interest trust, the settlor can ensure that their beneficiaries receive the benefits of the assets without having to pay IHT.
It is important to note that setting up a trust can be a complex process, and it is essential to seek professional advice to ensure that the trust is set up correctly and complies with all legal requirements Trustees have a legal obligation to act in the best interests of the beneficiaries, so it is crucial to choose trustees who are trustworthy and knowledgeable about the responsibilities involved.
In addition to using trusts to reduce IHT, there are other ways to mitigate the impact of IHT on an estate One common method is to make use of the various exemptions and reliefs that are available under IHT rules For example, gifts made to charities are exempt from IHT, as are gifts made to spouses or civil partners.
Another way to reduce the amount of IHT payable on an estate is to make use of the annual exemption Each individual is entitled to a tax-free gift allowance of £3,000 per year, which can be carried forward to the following year if not used This means that it is possible to make tax-free gifts of up to £6,000 in a single year.
It is also possible to reduce the impact of IHT by making use of the various business and agricultural reliefs that are available under IHT rules These reliefs can help to reduce the taxable value of certain types of assets, such as business interests or agricultural property.
In conclusion, IHT is a complex area of taxation that many people find overwhelming and confusing However, with some planning and the use of trusts and other strategies, it is possible to reduce the impact of IHT on your estate By seeking professional advice and taking advantage of the various exemptions and reliefs that are available, you can ensure that your beneficiaries receive the benefits of your assets without having to pay excessive amounts of IHT.