Posted inGeneral

How To Avoid Paying Inheritance Tax

How To Avoid Paying Inheritance Tax

Avoiding or minimizing inheritance tax (also called estate tax or death duty in some regions) legally involves strategic planning. Here’s a breakdown of common and legal methods to reduce or avoid inheritance tax, especially in places like the UK and the US, where the rules differ significantly.

🇬🇧 In the United Kingdom

1. Use the Nil-Rate Band

  • Everyone has a £325,000 tax-free allowance.
  • Anything above that is taxed at 40%.
  • If you leave your estate to a spouse or civil partner, there’s no tax.

2. Residence Nil-Rate Band (RNRB)

  • An additional £175,000 allowance if you pass your home to a direct descendant.
  • Can be transferred to a spouse, doubling to £1 million for a couple.

3. Gifting

  • Gifts made more than 7 years before death are tax-free.
  • Gifts within 7 years may be taxed on a sliding scale (“taper relief”).
  • Annual exemption: you can give away £3,000 per year tax-free.
  • Small gifts (up to £250) are exempt if given to different individuals.

4. Use of Trusts

  • Putting assets into a trust removes them from your estate, though rules are complex and may still attract charges.
  • Discretionary trusts or bare trusts are commonly used.

5. Charitable Donations

  • Leave 10% of your estate to charity to reduce inheritance tax rate from 40% to 36%.

6. Life Insurance Policies

  • A policy written in trust pays out outside your estate and can cover inheritance tax costs.

🇺🇸 In the United States

1. Use the Estate Tax Exemption

  • For 2024, the federal exemption is $13.61 million per person ($27.22 million for couples).
  • Amounts above this are taxed at up to 40%.
  • Use of lifetime gift exemptions also helps reduce estate value.

2. Annual Gift Tax Exclusion

  • You can give up to $18,000 per person per year tax-free (2024).
  • No limit on number of recipients.

3. Irrevocable Trusts

  • Assets in an Irrevocable Life Insurance Trust (ILIT) or Grantor Retained Annuity Trust (GRAT) are removed from your estate.
  • Popular for large estates to avoid future tax burdens.

4. Charitable Giving

  • Charitable Remainder Trusts (CRTs) or foundations can reduce the taxable estate while giving you income during life.

5. Spousal Transfers

  • Unlimited tax-free transfers to a U.S. citizen spouse.
  • Use of Portability Election ensures unused exemption transfers to spouse.

General Advice

✅ Start Early – Many strategies (like gifting or trusts) require years to be effective.
✅ Keep Good Records – HMRC and IRS scrutinize gifts and transfers.
✅ Get Professional Help – Tax laws are complex and change often; consult an estate planner or tax attorney.