Introduction:- Inheritance tax is levied on the estate of a deceased person at the time when it is transferred from the deceased person to the legal beneficiary. An estate can include a variety of assets like stocks, real estate, insurance policies(not held in trust), ISAs, antiques, jewellery, personal chattels, vehicles, gifts (made in the past seven years), cash, investments, and other valuable goods.

The value of assets is estimated on the date of death. As per the Inheritance Tax terms, you can avoid it in conditions like if you own a property which is your main residence at the time of death, you make a Will to reduce IHT, or if you set up a trust for your grandchildren.

However, even if the estate's worth is lower than the exempt IHT threshold, you need to report it to the HMRC even if you think you will not have to pay the tax. 

Traditionally, the IHT was introduced to encourage the redistribution of the deceased's wealth. If not levied, the rich will remain rich, and the wealthy will continue to get money from one generation to the next.

However, there has been much opposition to the idea as some people think the money used to buy the estate was already taxed in the first place, so the income generated by the estate should not be taxed afterwards, so it is believed that Inheritance tax is a kind of double taxation. 

There are ways to reduce the IHT liability, and ten ways to avoid inheritance tax are given below - 

The 10 Best Ways to Avoid Inheritance Tax

1. The residential nil rate band and gifts to spouse: You do not need to pay inheritance tax in conditions where the estate is worth less than the £325K threshold and where one leaves everything above the nil rate band to the spouse or civil partner or a charity. In addition, if you die and leave your estate to your spouse, they will inherit a tax-free allowance allowing them to gift up to £650K before IHT. 

2. Use Allowance:

You can legally give away £3K per year without paying any inheritance tax. If you have not used this allowance, you can carry it forward by one tax year, allowing you to gift up to £6K. The allowance is per person, so you get a double allowance if you are married.

3. Business Relief

Certain investments allow you to buy into a scheme that qualifies for Business Relief. It is useful when you want to retain control over the assets purchased and qualify for full relief. In addition, such schemes allow you to benefit from Inheritance Tax relief after two years, rather than wait for seven years if you make a gift.

4. Donations

There is no limit to how much money one can donate to charities or political parties. It can lower the total Inheritance Tax rate to 36%, provided that 10% of the "net estate" is gifted to a charity. Your "net estate" is the taxable value of your estate after your residence-nil rate band and any debts or liabilities have been repaid.  

5. Set Up A Trust

When you set up a Will trust, you create a legal arrangement where you give cash, property or investments to someone else to look after them for a beneficiary. An example is if you set up a trust fund for your grandchildren's education. Any assets held within a trust are likely to be exempt from inheritance tax on your death.  

6. Deed Of Variation

You can make changes to a Will after somebody has died. It is known as affecting a deed of variation. It can help lower Inheritance Tax, particularly where the intended beneficiary already has an inheritance tax liability. 

For example, grandparents can leave their children their estate, but if their children are already financially good, they may not demand the money. So the estate will remain unmoved, and on their death, inheritance tax is paid on this money.

As the deed of variation allows you to change the intended beneficiary, you could pass the assets straight to the grandchildren without requiring you to pay inheritance tax.

If there are any changes to the deceased's Will, all beneficiaries must approve and take place within two years of the death. A deed of variation is a complicated arrangement, and you need expert advice to use it.

7. Gift

Gifting reduces the estate's value for inheritance tax. There are no limits on the number of gifts you can make.

You need to work out how much you can afford to give away; depending on how you structure the gift, how much inheritance tax is saved will depend. Gifts can be of two types - "potentially exempt transfers" and "chargeable lifetime gifts". 

A potentially exempt transfer refers to giving unlimited gifts without any immediate inheritance tax charge, but you do not transfer money into a trust. If you survive seven years from making the gift, it falls outside your estate, and there is no inheritance tax liability. 

If the person who offers the gift dies within seven years, then some or the entire gift will be taxed. 

You can establish discounted gift trusts where the value of the gift is "discounted" depending upon the person's age, health and lifestyle. Any discount received provides an immediate inheritance tax saving. 

If you survive the seven years, the total gift is not accountable for Inheritance Tax. You get substantial savings if you are of higher age or in poor health.

9. Pension

One can nominate who will get the pension amount upon death. It does not have to be the spouse, as you can choose to give the pension to the children or anyone else. Such benefits are free of inheritance tax, but you should contact an expert to know in detail about how to apply for such reliefs.

10. Spend More

One can lower the  Inheritance Tax bill by spending more as it stops the asset from growing beyond the threshold limit.

However, balancing spending and having a secure future requires a lot of planning.

What is Inheritance Tax, and How Much Do I Pay?

Inheritance Tax is paid on the estate of someone who dies. Estate is the term for all assets, possessions, properties, investments, collectables and money. Following death, the executors of the Will calculate the value of all assets, and they deduct liabilities (debts) to get the estate value.

Currently, the inheritance tax rate is 40% on the taxable estate. However, estate values can decrease when the liabilities/ debts are more and if you fail to get the relief. 

You can reduce the IHT by setting up an inheritance tax trust. Some assets like pension plans, life insurance (held in trust) and trusts fall outside the estate and are not subject to inheritance tax. 

When you set up a Will trust, you create a legal arrangement where you give cash, property or investments to someone to look after them for a beneficiary. So, for example, you can choose to set up a trust fund for your grandchildren's education, and any assets held within the trust will likely be exempt from inheritance tax upon your death. 

How to Avoid Inheritance Tax UK?

If someone dies, their outstanding liabilities or expenses are repaid from their assets. As a result, it reduces the value of their estate. For example – Funeral expenses are allowed deductions from a person's estate before calculating inheritance tax.
 
If a person dies within three years of gifting, the gift's full value is included in the estate. However, if you die more than three years but less than seven years, then inheritance tax will be charged at a reduced rate like for 3-4 years - 32%, 4-5 years - 24%, 5-6 years- 16% and 6 to 7 - 8% and more than seven years is 0 per cent.

If someone dies after seven years of making a gift, then all the money will be exempt and not included when calculating the inheritance tax bill.

To avoid Inheritance Tax UK, you can give gifts, and there are no limits on the number of gifts you can make. However, giving away assets while alive still requires careful financial planning. First, you need to work out how much you can afford to give away whilst still ensuring that you have enough to meet your own needs.

Who Pays Inheritance Tax?

If you consider the UK your permanent home, IHT is payable on global assets. However, inheritance tax is only paid on UK assets if the UK is not your permanent home.

Your executors must pay the inheritance tax liability within six months following the death. A penalty will be applied to the estate if the tax is not paid within this timescale.

Inheritance Tax Trust allows a potentially exempt transfer where you make an outright gift (it means you do not transfer money into a trust). You can make unlimited gifts without any immediate inheritance tax charge. If you survive seven years from making the gift, it falls outside your estate, and you can avoid Inheritance Tax. 

How To Avoid Inheritance Tax On Property?

Bypassing Inheritance Tax on homes can be very complex, where you may have to set up a trust to ensure your estate does not have to pay inheritance tax. This legal arrangement allows you to offer cash, property or investments to somebody else to look after for the benefit of a third party.

Other types of reliefs are offered under the terms of Agricultural Relief, where it is possible to transfer certain types of buildings and agricultural land without being subject to inheritance tax.

Some other ways you can claim  Inheritance Taxes reliefs on the property include - making a will, transferring the asset, and leaving everything to a partner or children. There are many other complex ways to claim an exemption, which you can find out from your solicitor, and they may advise depending on personal financial circumstances.

How To Avoid Inheritance Tax With A Trust?

Inheritance Tax Planning is required to avoid losing a percentage of the estate's total value. A trust fund requires two roles – First is a trustee – the person who owns and manages the assets, and the second is a beneficiary for whom the trust is set up.

(Sometimes, the beneficiaries are children below 18 years or those who suffer from certain health issues and are incapable of managing the asset independently, so they need a trustee).

When you put items in a trust, it does not belong to the beneficiary and this way; you can avoid inheritance tax.

Setting up a trust has many implications, so it's advised to contact a solicitor or financial planner who can advise the options available to you.

Pensions and life insurance policies (held in trust) provide a good way of minimising your tax bill. The policies may need to be written 'in trust' with either of these. Any payouts will not form part of your estate but will go to your beneficiaries without being calculated towards inheritance tax. 

Conclusion:

The inheritance tax is paid off from the estate that is being transferred. The beneficiary does not have to pay the tax from their pocket, but in some cases, even after getting discounts and reliefs, one would still lose a significant chunk of the estate's value.

Therefore, one should plan to integrate the plans to ensure that your beneficiaries get the maximum value or all of your estate value. You should be careful not to deplete your assets too quickly into gifting or other options. Your overall goal should be to reduce your inheritance tax liability whilst ensuring you never run out of money.