If you have a substantial amount to leave in your will, it's likely that you'll be concerned about the amount of inheritance tax that will be deducted from your estate before it's passed onto your heirs. The threshold currently sits at amounts over £325,000, and if you're a property owner, it's fairly likely that you'll be leaving more than that. Don't worry, there are a few steps you can consider to mitigate this which we'll detail in this guide...
Spend or give it away
The simplest thing you can do is to give away part or all of your wealth whilst you're still alive.
There are several types of 'gift' you can give during your lifetime which are free of tax. Alongside that there are other types of gift you can give which may become tax-free- assuming that you outlive the 'gift' by seven years; which hopefully shouldn't be an issue if you are in good health. For more information on gift giving and the associated tax, please refer to our guide 'Avoiding Inheritance Tax: Gift Giving'
Another option that many consider is that of equity release, although this can prove costly and poor value for money. Equity release works by either borrowing money against the value of the property (lifetime mortgage), or selling off the property (or a portion of), for a lump sum, or set monthly instalment (home reversion).
When you die, with a lifetime mortgage, the debt is deducted from your estate when the house is sold. In the case of home reversion, when you die the percentage of stake you have left in the property is passed onto your heirs.
Sounds simple and fair in practice, but in reality equity release often leads to far more favourable terms for the lender. For example, with a lifetime mortgage, the interest accumulates as no repayments are made until you die or the property is sold. This obviously means you (or your heirs at least) can end up paying massive amounts of interest in respect to the original loan. With home reversion it's just a case of the lender offering you a ridiculously small amount of money for a large percentage of the property – it's not uncommon to have to hand over a 75% stake, in return for an advance of cash for 25% of the property’s market value
You'll find more information on this in our dedicated guides to equity release. If you still believe that equity release is the only option for you, it's well worth consulting a financial advisor before making any commitments
Life Insurance Policies
If your life insurance is to be paid to specific heirs after you die, you can consider putting the policy under a trust. You'll be pleased to hear that any policies under trust don't count at all towards the inheritance tax bill. There's even the added benefit that they can be paid out before probate is granted, meaning that the money filters down to your heirs much more quickly.
Deed of Variation
Using a deed of variation will allow your heirs to alter the will after your death. This can be beneficial as it will allow your heirs flexibility with the will, redirecting part of the inheritance if it helps the situation. You'll be reassured to know that all beneficiaries will need to agree to the variation, so it's not a chance for anyone to make changes to suit their own ends.
Taking out a policy called a 'whole of life' policy will help you insure against an inheritance tax bill if you can find a valid way to get around it. If you're later on in life, or suffer from bad health the premiums on such policies can be high, but you may consider asking your heirs to pay for it as it'll be them that ultimately benefit from it.
The idea is that you take out a policy which will pay out enough to cover the inheritance tax bill in the event of your death. Because such policies are underwritten by a trust, any payout will be exempt from inheritance tax. The money is also likely to be credited before the probate is granted which will enable your heirs to clear the tax bill as soon as it's due without any financial stress.