How can you Mitigate Inheritance Tax Liability as a Landlord?

Death duties can cripple families, as Inheritance Tax can be thousands of pounds. It is clear from recent HMRC figures showing a whopping 4.1bn in IHT receipts for the April to October 2022 period. The figure implies that the government pocketed 500m more than the previous year's amount.

Inheritance Tax Hits More Families

The recent decision to freeze the inheritance tax limit of 325,000 until April 2028 will push more families above the threshold. This will eliminate the need for more freezes in the future. Recent research indicates that, with the steadily increasing inflation rate and the tax freeze, the average IHT bill will rise to 336,605 by 2028 from the present 216,000. Hardworking families will find inheritance tax hitting them, debunking the myth that it only affects the super-rich.

The Impact of High Inheritance Tax

Paying much of your estate as inheritance tax or selling the property to pay the IHT can be devastating. Fortunately, there are legitimate ways to reduce or avoid inheritance tax through careful tax planning.

Make a Will

A will is the most effective and straightforward way to divide property among close relatives and minimize the Inheritance Tax bill. The government will distribute assets in the absence of a will by applying the rules of intestacy, resulting in a higher inheritance tax bill.

Making Gifts

You can minimize the value of your estate by giving away gifts. It is an effective approach to reducing inheritance tax. The annual exemption of 3,000 will not attract inheritance tax if you survive for seven years.

Types of Gifts That Can Help Reduce Inheritance Tax

The gifts besides the annual exemption from inheritance tax are:

• Gifts for the spouse
• Wedding gifts for parents, grandparents, and others
• Small gifts
• Gifts to political parties
• Gifts to charities
• Gifts from surplus income

Giving regular gifts from your income without affecting your living standards assures instant relief from inheritance tax. To avoid inheritance tax, giving gifts requires careful structuring.

Use of Allowances

Leveraging exemptions and allowances can effectively reduce the Inheritance Tax bill. The inheritance tax threshold or nil rate band is a universal exemption for all landlords. The first 325,000 of the property is exempt from inheritance tax. The nil rate band passes on to your spouse after death if you leave your assets to your spouse. The amount of the nil rate band doubles after adding the spouse's tax threshold.

An additional inheritance tax allowance of 175,000 is available as the Residential Nil Rate Band. It makes the total allowance 500,000 and the spouse can claim 1 million as a combined tax allowance after your death by leaving the primary residence to them.

Avoid Inclusion of Insurance Payout

Separating your life insurance policy from your assets is crucial to avoid inheritance tax on the amount of payout to beneficiaries after your death. If you put your life insurance in a trust, you will avoid the inclusion of the insurance payout in your estate and the consequent inheritance tax burden.

Giving to Charity

You can plan to leave a legacy by giving a minimum of 10 percent of your estate to charity. The applicable inheritance tax in such a case will be 36 percent on the remaining estate.

Setting Up a Trust

A professional financial adviser can guide you in setting up a trust to exclude the portion of your estate from inheritance tax liability. You need to determine the type of trust that meets your needs.

Spending to Minimize Inheritance Tax Liability

You can avoid a higher inheritance tax bill by preventing your assets from growing. Spending is a logical approach to minimizing your Inheritance Tax liability. It is also worthy of note that a penalty will apply to the estate if the executors cannot pay inheritance tax within six months of the date of death.

Tax Planning Valuations

Ringley carries out valuations for all taxation purposes including capital gains and inheritance tax, both to assist clients and their accountants in tax planning but also to assist relatives of the deceased. Tax planning valuations also assist when transferring a property to a trust, pension or to minimise capital gains tax after a disposal.