Inheritance tax can be a significant concern when planning your estate, but there are strategic ways to minimise its impact. An effective method of reducing IHT is to gift assets to your grandchildren during your lifetime.
Here’s how you can leverage this approach to reduce your inheritance tax liability:
Understand the Basics of Inheritance Tax
Inheritance tax is a tax on the estate you leave behind, including property, savings, and investments. The amount of tax owed depends on the value of your estate and the applicable tax rate. By planning ahead and gifting assets, you can potentially reduce the total value of your estate and therefore, the amount of tax due.
Utilise the Annual Gift Allowance
In many jurisdictions, there is an annual gift allowance that allows you to give a certain amount of money or assets each year without incurring tax. By making use of this allowance, you can transfer funds or assets to your grandchildren regularly, reducing the value of your estate incrementally over time. Be sure to check the current limits and rules in your area, as these can vary.
Take Advantage of Exemptions and Reliefs
Different types of gifts may qualify for exemptions or reliefs, such as gifts for education or medical expenses. Contributions to your grandchildren’s education or health expenses may not be subject to inheritance tax, provided they meet specific criteria. Familiarise yourself with these rules to maximize your tax savings.
Set Up a Trust
Creating a trust can be an effective way to manage and distribute your assets while minimizing inheritance tax. By placing assets in a trust for the benefit of your grandchildren, you can ensure they receive the benefits without adding to your estate’s value.
Consider Making Larger Gifts
If your financial situation allows, making larger gifts can significantly reduce your estate’s value. While larger gifts may have immediate tax implications, they can be structured in a way to minimize tax liability over time. Be aware of any potential tax consequences and consult with a tax professional to navigate the rules effectively.
Keep Detailed Records
Maintaining accurate records of all gifts made is crucial. This documentation will help ensure that your gifts are properly accounted for and that you can demonstrate compliance with tax regulations. Proper record-keeping also helps in avoiding any future disputes or misunderstandings regarding your estate planning.
Gifting To The Grandkids
By gifting to your grandchildren, you can reduce the size of your estate and potentially lower the amount of inheritance tax owed. With careful planning and the right strategies, you can make a meaningful impact on your grandchildren’s future while optimising your tax situation.
If you would like to give yourself the best chance of passing on a legacy that suits your family’s circumstances, arrange a Discovery Call with one of our FCA authorised wealth managers [Here]
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