There are many things that we may want to leave to our loved ones when we pass away, from fond memories to heirlooms, but the one thing we don’t want to pass on is a hefty Inheritance Tax bill.
To avoid what is commonly called ‘Britain’s most hated tax’, many people set up trusts without fully exploring all their options.
If you’re concerned at the thought of how much Inheritance Tax your loved ones may have to pay when you pass away, read on to find out why trusts shouldn’t necessarily be the go-to solution, and three alternatives to consider first.
Trusts can be a useful option, but don’t need to be your only option
As real financial planners, a large part of our role is to help our clients with estate planning. When that topic arises, many people immediately jump to the idea of setting up a trust without really understanding what one is and how it needs to be managed.
Trusts can be useful, but they can also be complex. For instance, there are several different types of trusts and each of these have different tax consequences.
While setting up a trust can be a smart move to avoid Inheritance Tax, it doesn’t have to be your first choice. Before you place your assets into a trust, here are three things you should consider doing first.
1. Spend it
Retirees can often feel a reluctance to spend their hard-earned savings for a variety of reasons. One source of guilt is the thought of eating into the inheritance that they’d be leaving to their loved ones, but a more common fear is that, by spending too much, they won’t have enough to live on later in life.
While this is an understandable concern, having a financial planner to help you manage your money can let you lay that fear to rest. Our job is to give you the confidence to spend your money and achieve your retirement goals without worry.
While it might not be wise to put your entire pension fund on a horse at the next Grand National, you shouldn’t be afraid to spend your money on things that you enjoy. As well as ensuring you live the life you want in retirement, it also reduces the value of your estate, which translates to a lower Inheritance Tax bill for your loved ones when you pass away.
Spending money on holidays, for example, can be a great way to enjoy your retirement without breaking the bank. Research from the consumer group Which? found that the average retiree spends £4,540 per year on holidays, with many of the people surveyed considering it a ‘very important’ part of their retirement.
2. Gift it
Gifting money to loved ones can be another good way to avoid Inheritance Tax. You can gift whatever you like as long as you live for another seven years after gifting. If you die within seven years of making the gift, there may be some Inheritance Tax to pay – although this tapers in the later years.
You also have an annual gifting allowance. Every tax year, you can give £3,000 away to family and friends without them being liable to pay Inheritance Tax on the amount. You can also roll this allowance over into a second tax year if you haven’t used it, up to a maximum of £6,000.
On top of this, you can give an additional £250 to any amount of people every tax year.
If a loved one is getting married or having a civil ceremony, this can be a good opportunity to give gifts too. Parents can gift up to £5,000 to each child as a wedding gift without them being liable for Inheritance Tax, whilst grandparents can give a grandchild up to £2,500. If you want to gift money to any other friends or acquaintances for a wedding, the limit is £1,000.
3. Give it to charity
Any money that you give to a qualifying charity is exempt from Inheritance Tax and could also reduce the tax you would pay on your remaining estate. This is a good option if you want to reduce your tax bill while also supporting good causes.
Gifting money to a charity can reduce your Inheritance Tax in two ways. Firstly, and most simply, by donating money you are reducing the value of your estate.
Secondly, giving at least 10% of your estate to charity would also reduce the rate of Inheritance Tax you pay on your remaining estate from 40% to 36%.
Doing this would allow you to shave some money off your Inheritance Tax bill and also allow you to support your favourite charities – even after you had passed away.
Get in touch
While there are alternatives to setting up a trust, they can still be an appropriate option for some clients. There are several different types of trust, and so it is wise to talk this through with a financial planner before making any decisions.
If you want to chat about any potential estate planning concerns, please get in touch. Email firstname.lastname@example.org or call us on 01621 851563.