What Exactly Are Inheritance Taxes?
IHT or ‘inheritance tax’ is the tax applied on the possessions (money, assets, etc.), that exceed the threshold of a person that died. Therefore, the beneficiary does not receive everything, but shares it with the state. Many people do not want this, and prefer that all the value (or as much as possible) goes where they want it to go.
Inheritance tax varies depending on the country. To illustrate the differences, two of the most influential English-speaking countries are presented:
- UK – The threshold is at £325,000, in 2024, and 40% of what’s above the threshold is IHT.
- USA – The taxes differ from one state to another. It can be anywhere from 18 to 40%, and some states do not have inheritance taxes at all.
The situation also differs, as some countries have fixed taxes, others have progressive ones, and some don’t have inheritance taxes at all. It’s advised to research the inheritance tax for your country/state specifically, as there is no general law. In UK, you will not be paying inheritance taxes if the value is below the threshold, or if you pass what’s above the threshold to your spouse/civil partner, or a charity. But there are some other things you could do that will help you avoid pay these inheritance taxes.
Can You Avoid Paying Inheritance Taxes?
Inheritance tax planning is exactly about this; it’s about not paying those taxes. And, there are different ways through which you can minimise inheritance taxes. Besides transferring to your partner, or charitable donations, there are other solutions you need to know about. Especially if valuable possessions are at stake, this step is very important.
- Gifts (e.g. In the UK, you can give up to £3,000 annually)
- Trusts (Discretionary or bare trusts) – The laws for trusts are very complicated, and must be researched attentively. But they can be of great help if used correctly.
- BPR (Business Property Relief) and ‘Agriculture Relief’ – This reduces the value of possessions (certain assets or farmland).
- Life insurance
These are only some of the routes you could take. The path you choose must fit your exact situation, that’s why it’s important to be informed, and know exactly what are the elements that you need to look for when deciding.
What to Keep in Mind When Inheritance Tax Planning?
Now you know what inheritance tax planning is, and how it can help you! But, picking the best option for you is even more important. What should you look for? What should you take into consideration?
First and foremost, probably the best step to take is, talking to qualified advisors. The way to make sure that your wealth will be handled exactly as wanted is with the help of inheritance tax planning professionals. The laws can be tricky and complex and sometimes hard to understand for people who don’t know much about laws and governance. Experts in this domain will analyse your situation, and come up with the best solution for you. Look for tailored guidance, and someone that will take into consideration all the possibilities. Search for people who value effective communication and collaboration.
Secondly, tax fluctuations. Laws, especially those concerning taxes, change over time. You should revise your plan once in a while, to make sure it’s in agreement with the legal regulations. (e.g. The threshold might change, and this detail could change your plan entirely). While at this, make sure everything is up to date (wills and other related documents).
Thirdly, time and place. Some of the solutions need more time to be planned and applied, and do not work if implemented in the last second. Even if it’s something that seems like it can be postponed, it’s always better to start sooner than later.
Last but not least, there is one bonus point worth mentioning. If there are multiple heirs, they should probably know the plans, so that they don’t fight afterwards!
Thinking of An Asset Protection Trust?
Asset protection trust and inheritance tax planning go hand in hand when it comes to keeping your wealth safe and in good hands. While it is true that they both protect wealth, they address different problems. And, this is exactly why it’s important to know about this too.
This type of trust is set up while you are alive, and the beneficiary receives the assets after your death. Why would you do this? Because while your assets are part of this trust, they are no longer your ownership. Therefore, inaccessible for creditors. Also, you can still use the assets just as before.
As there are enough people who exceed the threshold, it is a common practice for people to use an asset protection trust in UK. People use this option because it allows them to ensure financial safety for their families; but also keep the assets safe from any kind of external changes.
Conclusion
If you want to protect both your family, and your wealth, start thinking seriously of inheritance tax planning. Remember that you now have information from basic things like ‘What IHT is?’ to more complex ones, like an ‘asset protection trust in the UK’. Continue your research, but know that you can always come back to this article. Protect your wealth, so you can fully pass it to the ones you love, and the ones that you know will care for it as much as you did.
