People planning to pass on their estate may be able to trim off £70,000 from their inheritance tax bill by taking advantage of a little-known rule.
There is a standard £325,000 nil rate allowance for inheritance tax which allows a person to pass on this much of their estate tax-free, but there are other nil rate allowances available.
Neil Rayner, head of advice at wealth firm True Potential, said: “A little-known tip for minimising your inheritance tax bill is taking advantage of downsizing relief.
“Currently, the residence nil-rate band (RNRB) offers an extra tax-free allowance of up to £175,000 when residential property is left to direct descendants up to properties worth £2million.
“If your house is worth more than £2million, selling that property and downsizing to a home which qualifies for the RNRB ensures that an individual’s beneficiaries can benefit from the same tax-free threshold as if the larger property had been retained.
“Downsizing can also release funds that may be used to support retirement or other financial needs, while still ensuring that a significant portion of the estate remains sheltered from IHT through the RNRB.”
There are several other things families can do to reduce the inheritance tax bill their estate if liable for.
It’s worth understanding that any portion of an individual’s unused allowances can be passed on to their spouse or civil partner when they die.
Another way to bring down your bill is to give away tax-free gifts, so reducing the size of your estate.
Mr Rayner said: “While it is traditionally understood that inheritance passes on when you die, if you can afford it, giving some of our assets away early could bring your estates value under the nil-rate band, meaning it no longer qualifies for inheritance tax.
“That said, this exemption only applies if the gift was granted seven years before death. Therefore, those considering this as a tactic for maximising their tax-efficiency should look at granting these gifts earlier in their retirement years to ensure that the gift is not included in the estate’s value and thus, subject to inheritance tax.”
The tax expert also explained how your could save into a pension to avoid inheritance tax.
He said: ” At present, personal pensions are not considered part of your estate, this means they cannot be taxed as part of any Inheritance Tax and have increasingly been used as a tool to maximise how much you can pass down to your loved ones.
“An estate worth £1million (assuming no other reliefs or exemptions), could be subject to a £270,000 inheritance tax bill.
“However, if you maxed out your personal pension over five years, this would mean that an additional £300,000 would be taken outside of the taxable value of your estate.
“If an individual was to die before 75, this could reduce their beneficiaries tax bill to £150,000, creating an inheritance saving of 50 percent.
“If you were to live beyond 75, your beneficiaries would be subject to Income Tax on any withdrawals at their marginal rate (the highest rate of income tax that they pay).”
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