You might have mostly heard this frequently asked question, “Where you see yourself in the next five to ten years?” and people have a long list of goals to deliver. But what if you don’t even have a chance to live for the next years. What are your strategies then because life is too much uncertain? You will be concerned for your family. Inheritance tax planning will help you for future planning.
You will try to secure their position first by making a lot of money to pass on them. It is a well-known fact that taxes are a must thing in this world and everyone pays it on a daily basis. The money you have made implies under the same condition. In simple words, your direct descendants have to pay inheritance tax.
“What if you don’t even have a chance to live for next years? What are your strategies then because life is to much uncertain.”
The inheritance tax will increase with an increment in the number of assets or money left behind. So your basic concern is how to limit your specified inheritance tax. In this brief article, we will be sharing different tricks through which you could reduce your inheritance tax liability by inheritance tax planning and maximize the transfer of wealth to the next generation.
So let’s just jump into different strategies that help you to avoid inheritance tax by considering inheritance tax planning.
Strategies No. 1: Purchase Discount Gift TrustsThe first strategy that you can adopt is “DISCOUNTED GIFT TRUST.” Now, what does that mean? A discounted gift trust is a bit of legal paperwork setting up trust around an offshore investment bond that can hold global assets. This term specifies a fixed annual payment back to the settlor. Like, if you invested a particular amount into this offshore trust, a total of 5%of the initial settlement could be paid back to you per annum for almost 20 years. So, investment bonds have a 5% withdrawal allowance with zero percent income tax to pay. This means if you can easily withdraw 5% of your investment from an investment bond without paying a single penny.
£ 500,000 ..………………… Total Cash
(375,000) ..……………….. Gift
£ 143,000 ..………………… Amount Subject to IHT
* 0.40 ..………………… IHT Rate
[ £ 57,200 ] …………………… Amount to be paid to HMRC
But by simply converting this money into CGT and receiving cashback of 5 percent, this tax can be avoided. Discounted Gift trust can be used for individuals with sizeable estates that want an immediate reduction in inheritance tax liability. It’s a no-cost effective method that could be adopted
Strategies No. 2: Avail Loan TrustAnother strategy that can be adapted to use the inheritance nil rate band in your favor is “LOAN TRUST.” In this strategy, the client lends monies to trustees, and trustees invest in a life company bond. This loan is repayable on demand with no interest on death. A client can receive back the original investment from the trustee in lump sum form, by using a 5% tax-deferred allowance or by a combination of both. The original loan is not inheritance tax efficient remains in the state as no gift made, but the growth on the investment outside the estate from day one. This freezes the client’s liability on investments to the loan. This mechanism is often referred to as asset freezing. Let’s suppose that a person is of age 50, and we expect his life to be 34 more years meaning up to 80 years. The 5% tax-deferred tax allowance per annum would simply mean an 80% return of money without any tax. This method could be adopted to make some specific assets free from inheritance tax.
Strategies No. 3: Register for Life Insurance
Considering “LIFE INSURANCE” as a loophole for inheritance tax planning will be a smart move. But the question is, how can life insurance help with inheritance tax? Whole life- insurance policies have many benefits and one of which is that they can help beneficiaries deal with the burden of inheritance tax.
If inheritance tax is due on an estate, it has to be paid before the assets of the estate are released to beneficiaries. As a result, individuals need to take out loans to cover the bills before they can receive their inheritance. The whole of life insurance can be used to clear this bill without recourse to borrowing.
Strategies No. 4: Take Advantage of Life Insurance PolicyYou can also put your life insurance policy into a trust to avoid tax to pay. By doing this, your policy will be paid out without delay. The money you leave in a life insurance policy may be subjected to inheritance tax. To make sure that your loved ones receive the money you want them to have, place your life insurance policy into a trust to ensure the right people receive the right money at right time. The principle of making money tax-free is the same as that of loan trust making a 5% withdrawal allowance for you. So, think properly and start investing today with the help of a financial adviser.
“To make sure that your loved ones receive the money you want them to have, place your life insurance policy into a trust to ensure the right people receive the right money at the right time. “
Strategies No. 5: Pay for PensionsPensions are normally considered as an effective way to save you from inheritance tax making it at a minimum level. There are several huge benefits that the back pension system has at the moment. The main thing is you can earn money which might be taxed up to 40% if you are just taxed on it as income. You can put that in your pension, and at that moment it’s not taxed at all. So now it’s up to you to have 5000 pounds in your pocket or ten thousand pounds in your pension scheme. The latter option sounds good. The advantage over here is that, at retirement, you only have to pay 20% of tax instead of 40% which ultimately reduces your tax to pay. You also get a 25% tax-free lump sum of what you put into your pension.
“…it’s up to you to have five thousand pounds in your pocket or ten thousand pounds in your pension scheme… “
Strategies No. 6: Give Gifts While Still AliveYou can also commit inheritance tax planning for sake of minimizing it by giving gifts while you are still alive. You can give money away this is a fairly straightforward mechanism. So, the general rule potentially exempt transfers, potentially because you need to live another seven years to them to be definitively exempt, are gifts made of cash, property, or almost anything. They would normally be excluded from a death estate. Under the inheritance tax rules its seven years is a good rule of thumb! Some gifts are automatically exempt no matter when they are made even if they are made only two years before death.
Strategies No. 7: Alternative Investments Markets (AIM)Alternative investment markets also play a basic role in inheritance tax planning. Offering the prospect of tax return, many AIM stocks are also eligible to be free of inheritance tax after two years. With IHT receipts topping 5 billion pounds last year, it’s no surprise that managed Alternative Investment Markets portfolios have been rising in popularity with wealthy investors. Investing in alternatives means investing in infrastructures like water pipelines and roads, etc. A much smarter move is to convert a specific amount of your assets into alternative investment markets where you invest your money in different projects that are nil rate band. In this case, your investments would be atomically freed from inheritance tax making your property being passed to your descendants free of tax.
Strategies No. 8: Donate to a CharityA simple method to make your assets and cash tax-free is to spend your money. Well, that sounds quite odd in the sense that what will you leaving behind you if you spent all the money. A much wiser answer is to convert your money into charity. Now, this expenditure ratio of money is completely up to you as you are the one who decides that how much money needs to be spent on charity. Most financial advisors suggest spending your money in such a way that the nil rate band does not get crossed, which means it should be less than 35,000 pounds. Now, what benefit can you get when you do charity for a certain amount? To understand this, we shall proceed with an example. For example, if you are a married couple, filing your return jointly, and you make £100,000 a year in taxable income, then your highest marginal tax rate is 25%, so the way that a charitable donation make-work is that like this: if your taxable income is £100, 000 and you, throughout the year or at a onetime gift decided to give £5000 to your local church or whatever charitable organization, the £5000 reduces the top level of year income rate giving £1250 as a tax benefit.
“Proper Inheritance tax planning is required to decide about the proper amount to be donated in a charity to avoid tax to pay. “
Strategies No. 9: Utilize Exemptions and ReliefsCapital gain tax can be managed by considering all available reliefs and exemptions. The use of exemptions can make a huge difference in inheritance tax planning. These may be in the form of annual exemptions, small gifts exemptions, and normal expenditure out of income exemption. It is possible to make gifts to certain people and organizations without having to pay any IHT. There is no limit on the amount that can be gifted to them, which means the amount given will all be exempt from IHT. Some gifts cannot be included in the estate even if the individual dies within the seven years of making the gift.
The use of annual exemptions means the usage of three thousand pounds can be gifted each tax year without any tax to pay. Small gifts exemption allows for a gift of up to 250 pounds to be made more than one individual in any one tax year without it be subjected to tax.
So, just by covering your exemptions, you can simply reduce your inheritance tax.