How to avoid paying inheritance tax

An inheritance tax is a tax that a person pays for the total value of his or her assets and on all the gifts that he or she has made in the seven years that preceded his or her death. The amount of this tax represents 40 per cent of the total value of the assets, if those assets have a value that is greater than a specific amount of money that is decided by each state in which this tax is applied.

What constitutes inheritance tax?

The term ‘inheritance tax' is mostly used in the United Kingdom, Ireland and 4 states in the United States of America (New Jersey, Nebraska, Pennsylvania and Tennessee). In most other states of the United States of America, ‘inheritance tax' has been replaced with the term ‘estate tax'.

The inheritance tax law was initially designed to affect only the very wealthy people because it clearly states that only assets that are more valuable than a pre-determined amount of money fall under its incidence. For instance, in the United Kingdom, the inheritance tax law only applies to assets that are worth more than 263,000 pounds.

When this tax was established, this sum represented a great fortune, but due to inflation and rise in the prices of houses and apartments in the United Kingdom, almost one and a half million citizens of this country have to pay this tax. Fortunately, avoiding the inheritance tax is very easy.

Nil-rate band

One of the simplest ways to avoid the inheritance tax is to leave your estate to your family members in the right amounts. That means that, while you and your spouse are still alive, you should equally divide your assets between the two of you so that the value of each of your possessions does not surpass the nil-rate band.

It is true that you can avoid inheritance tax payments if you leave your assets to your spouse after you die, since spouses do not pay inheritance tax for the goods that they have inherited from the other spouse. However, once your spouse dies too, your children will not be able to avoid inheritance tax payments.

If you divide your assets between you and your spouse before you die, you can each leave your children an amount of money that is below the nil-rate band. This way, your children can completely avoid inheritance tax payments.

Device assets between family members

If you do not want to pay inheritance tax, you can reduce the value of your estate until it is under the nil-rate band. You can do this by giving small gifts to a large number of people, giving large wedding gifts to your children or anyone else in your extended family and making donations to charitable organizations.

These three categories of gifts are excluded from the inheritance tax law. If you cannot reduce your estate enough to avoid inheritance tax payments, at least you can reduce the value of that tax.

If you have stocks, your children or your spouse will have to get an inheritance tax waiver in order to transfer these stocks if they do not want to pay the inheritance tax for those stocks. An inheritance tax waiver means that whoever receives the stocks has to also pay the inheritance tax.