The simplest way to pay your inheritance tax bill
Life is complicated, and so is tax. That’s why we’ve written this article about the simplest way to pay your inheritance tax bill. If your estate is large enough, your beneficiaries may well end up paying inheritance tax on your death.
Large enough? Well, if you are single, we’re talking about over £325,000 or over £650,000 if you are married. Many unsuspecting people may be caught in the inheritance tax net, as this is not a lot.
The residence nil rate band means that the family home may be passed more easily to direct descendants on death. This is frozen at £175,000 until 2028.
Inheritance tax receipts amounted to approximately 7 billion pounds in 2022/23, up 1 billion from the previous financial year. This is a nice little earner for HMRC! Although considered unfair by many, the UK government is in no hurry to make amends. Why would they? It’s a great money spinner. Consequently, the inheritance tax nil rate band has been held as it is since 2009.
Complex inheritance tax planning
Gifting your home to your children is a means to avoid inheritance tax. However, avoiding it entirely isn’t always possible. The good news is there are many ways to discover the simplest way to pay your inheritance tax bill – or reduce it substantially.
You could make annual gifts of up to £3,000 each year, however, if your estate was reasonably large, you’d have to make several such gifts to make a dent in the value of your estate.
Charitable donations are another way of reducing your inheritance tax liability while supporting causes you care about. However, some would rather that money went to their children.
Equity release is becoming a popular way of taking equity out of your home. This in turn could reduce the value of your estate and therefore, using equity release to reduce inheritance tax is one potential strategy. It however involves raising capital through borrowing and with interest rates where they are today, the main winners are the lenders.
If your estate was made up of a fair amount of cash, you could invest it and put the investment in trust for the benefit of your beneficiaries. After seven years, the trust would fall out of your estate. Not everyone has a lot of cash lying around, so this type of planning has its limitations.
Using life insurance to pay your inheritance tax bill
Using life insurance could be considered the simplest way to pay your inheritance tax bill. It involves working out what your inheritance tax bill may be after using some or all the planning options mentioned above. Next, set up a life insurance policy for the potential liability. Finally, write the insurance policy in trust to ensure it falls out of your estate and goes to your nominated beneficiaries. Simple!
Whist paying your inheritance tax bill out of the proceeds of a life insurance policy may appear relatively simple, we would strongly recommend seeking the advice of an independent financial adviser, as getting it wrong could make your position worse. They would know things like how best to set up the policy, and whether to use a term or a whole-of-life plan. The same goes for all the planning methods mentioned above.
Related reading: Using trusts to avoid inheritance tax
You’d have to have a reasonably clean bill of health to get through underwriting, and the insurance would cost more for older applicants. But the advantages are huge. Inheritance tax must be paid 6 within months of your death. The life insurance would pay out almost immediately, avoiding all the hassle that goes along with probate.
Your family could use the payout to pay any tax owing without having to raid your savings or sell property prematurely. The only question is whether you or your children should pay the premiums. That’s one for another day!
Summary: The simplest way to pay your inheritance tax bill
The simplest way to pay your inheritance tax bill is through a well-structured life insurance policy. This strategy involves estimating your potential tax liability, setting up a policy, and placing it in trust for your beneficiaries.
However, it’s crucial to seek advice from an independent financial adviser to ensure you navigate this process correctly. While other methods like gifting, equity release, and charitable donations exist, life insurance stands out for its simplicity and immediate payout upon your passing.
This approach alleviates the burden on your family and allows them to settle the tax without depleting your savings or selling assets prematurely.
Need advice?
If you are looking for advice on how to protect your assets, we have a range of services on offer. These include:
Everything starts with a complimentary, no-obligation consultation with an experienced financial adviser.
