For all of us, life, whether it is good or bad, cheerful or sad, long or short, will, at some point, come to an end. It is, after all, a reality of living and a constant reminder that each day should be enjoyed to the fullest. We can’t control when we depart from this world and leave our family to carry out our legacy, but what we can do instead is to ensure the proper succession of our assets and help our loved ones avoid the problematic IHT rates imposed by the British government. There are ways to avoid inheritance tax, but you can only learn about them through the help of specialists.
Seeking inheritance tax advice can be one of your wisest decisions as if left unchecked, IHT could have a significant impact on the market value of your estate. Inheritance tax advisors can minimise your estate’s IHT obligations through various techniques, such as transferring your assets to the protection of a trust. Moreover, the specialists you consult will be familiar with British legislation, will handle the necessary documents for transferring your estate to a trust before the moment of your passing, and will minimise the impact of family financial disputes, acting as an administrator of your assets under your direct instructions.
What Are the Benefits of Trusts?
Trusts can be defined as a fiduciary relationship in which grantors transfer ownership rights of tangible assets to a third party, who will manage them in accordance with your wishes and transfer them to beneficiaries at the moment of your death. In other words, when you transfer your estate’s assets to a trust, you essentially relinquish your rights over those assets, which means that at the moment of death, your inheritance will not be subject to the same level of IHT obligations as it would be in the case of direct succession. Once the assets are placed in the administration of a trustee, they are effectively removed from your estate, which will reduce its overall valuation and impact the amount of taxes your successors will have to pay.
According to British laws, trusts can make use of the nil rate band, which, as of 2024, stands at £325,000. What this means is that you can transfer this amount of assets to a third-party administered trust without incurring IHT. Do you want to transfer more than the nil rate to your successors? If so, there might be ways around it, such as utilising the unused nil rate of a deceased spouse. There is also the possibility of transferring assets into a trust as gifts. In the UK, gifts transferred under the management of a trust are considered potentially exempt transfers, or PETs, and are exempt from IHT indefinitely, as long as you live for seven years after you approve the transfer.
The Seven-Year Rule
If you pass away in less than seven years after approving the transfer of your assets, then, according to British legislation, your descendants will have to pay a tax rate based on the time that has passed between the asset transfer and the moment of your passing. Gifts made between 3 and 7 years before your death are taxed on a sliding scale known as “taper relief.” If you die six years after you gift your asset, your successors will have to pay a tax rate of 8%. If you die three years after the transfer, then they will need to pay 32%. It is, when you think about it, a bit absurd, which is why seeking inheritance tax advice should be your priority.
There are also other ways to avoid inheritance tax in the UK or at least reduce the financial obligations of your heirs. You can, for example, make gifts totalling £3,000 per year to chosen individuals. Another option to consider is taking out a life insurance policy and placing it under the management of an external trust. That way, the payout will not be part of your estate and thus will not contribute to IHT. Not least, you could combine your nil-rate bands with your spouse for a total of £1 million or leave at least 10% of your estate net value to charity, thus reducing the IHT rate payable by your beneficiaries from 40% to 36%.
What Other Advantages Do Trusts Present?
Inheritance tax advice is not only practical for avoiding IHT but can also represent a way to ensure the correct distribution of your assets to vulnerable beneficiaries. Although it does not function precisely like a will, a trust can be used to distribute your monetary assets in an orderly fashion, respecting a distinct set of criteria laid out before your passing. Your trustee will distribute your inheritance based on certain life milestones and administer your private assets until your beneficiaries are ready to receive control over your estate.
For example, do you want your assets to go to your child, but you’re worried that a large sum of money might affect their studies? If so, you could stipulate in your trust agreement that the assets are only accessible if the beneficiaries complete their university education. Trusts provide long-term asset management even long after the settlor’s passing. The assets transferred to them are typically, at least in Britain, protected from creditors, and they do not go through probate, so the monetary value of your estate should, at least in theory, remain private. Yes, everyone wants to avoid inheritance tax, but trusts are more than just tools to skip IHT obligations. At the end of the day, they are powerful financial instruments that can help with your succession planning and contribute positively to the economic well-being of your heirs.
It’s a Part of Life
Planning for events that will happen after our death is something that most of us don’t want to deal with. However, it is, unfortunately, a reality of life that we should embrace for what it is: an opportunity to minimise disruptions and keep our business or legacy safe from external interference. The inheritance tax advice expert handling your case will provide the guidance required to navigate the complex legal framework associated with British succession planning, help you protect your hard-earned investments, and ensure that your assets will be distributed according to your wishes, tax-free.
Inheritance tax advice is crucial for long-term financial preservation, as it represents the best way for your inheritance to be passed to select successors without the risk of excessive taxation. Ultimately, everyone wishes for their heirs to benefit from the fruits of hard work and enjoy their inheritance without excessive taxation. Trusts are an efficient tool to avoid inheritance tax in the UK, and they also represent a technique by which your assets can be protected in cases of family inheritance conflicts, divorces, or bank disputes. Indeed, our inheritance is something that’s not on the minds of most of us. However, what you leave behind is your legacy. And your legacy should be protected.
