How Can I Avoid Paying Inheritance Tax?

Note: The following article is part of our Complimentary Articles Series, designed to provide additional insights and detailed information on specific topics within estate planning.

In conjunction with the following article, we recommend you review the following pillar articles to understand inheritance taxes comprehensively.

• What is Inheritance Tax (IHT)?
• How Do I Pay Inheritance Tax to HMRC?
• How Much Inheritance Tax Do I Have to Pay?
• When Does IHT Need to Be Paid?

Caution: While this article clarifies some common misconceptions about tax avoidance and tax evasion, the content serves as a guideline only. When making tax-related decisions, always consult a tax professional.

INTRODUCTION

In estate planning, minimising Inheritance Tax (IHT) can frequently trigger confusion and concern. It is required by law to declare whether or not Inheritance Tax is due, and this requirement applies irrespective of the Estate's actual IHT liability.

Nevertheless, you can still explore ways to minimise your IHT exposure, provided your efforts to reduce this tax are legitimate. However, it's not always clear what constitutes legal and unlawful tax reduction, and any false assumptions or missteps regarding tax could land you in serious legal trouble.

This article aims to demystify the subject of legitimately minimising your tax liabilities by clarifying the difference between tax avoidance and tax evasion.

Caution: While this article clarifies some common misconceptions about tax avoidance and tax evasion, the content serves as a guideline only. When making tax-related decisions, always consult a tax professional.

TAX AVOIDANCE (LEGAL)

Tax avoidance is the legal practice of reducing your tax liability by structuring your financial affairs in a way that complies with the law.

Although a detailed list of tactics is outside the purview of this FAQ, there are a few popular ways to lower your IHT liability lawfully.

EXAMPLES:

Non-Estate-Related Examples of Tax AVOIDANCE:

• Tax-Efficient Investments: Invest in assets with certain tax advantages, such as specific pension contributions or bonds.

• Individual Savings Accounts (ISAs): You can grow your investments without paying income or capital gains tax by investing in tax-free savings vehicles like ISAs.

• Making the Most of Tax Credits and Deductions: Taking advantage of all tax credits, deductions, and available allowances. Examples might include educational costs, home energy improvements, or investing in tax-efficient vehicles.

• Contributions to Charities: A charitable donation not only contributes to a worthy cause but also offers significant tax advantages.

Tax AVOIDANCE Examples Related to Estate Planning:

• Making a Will: Making a Will not only guarantees that your Estate is distributed in accordance with your wishes but can also help you make some strategic decisions to help you lower your Inheritance Tax (IHT).

• Making the Most of Gifts: Make use of gift exemptions and allowances, like the yearly £3,000 gift exemption, to lower the taxable amount of your Estate.

• Charitable Giving: You can also pledge either part or the entirety of your Estate to philanthropic causes, which can lower an Estate's overall IHT obligation.

• Deed of Variation: This vehicle allows beneficiaries to reroute their inheritance to reduce Inheritance Tax (IHT).

• Equity Release: Homeowners can reduce their Inheritance Tax (IHT) obligations by releasing equity from their property.

Summary: The main characteristic of TAX AVOIDANCE STRATEGIES is that they enable people and Estates to reduce their obligations in a legally compliant and ethical manner by operating within the bounds of the law.

TAX EVASION (ILLEGAL)

Tax evasion is the unlawful act of failing to pay owed taxes by knowingly concealing or misrepresenting important tax information to reduce tax liabilities.

Parties who attempt to lower their tax obligations by withholding information or providing false information is a serious criminal offence which could result in hefty fines and/or imprisonment.

Non-Estate-Related Examples of Tax EVASION:

• Offshore Accounts: Keeping assets or income hidden in offshore accounts to avoid having to declare them for taxes.

• Unreported Income: When cash income is purposefully withheld from tax reports or underreported, it is referred to as unreported income.

• Inflated Deductions: Falsely claiming inflated deductions for costs that were either unreasonably incurred or unrelated to income received.

• Falsified Records: These are financial records that are manipulated to artificially reduce the tax burden by inflating expenses or understating revenue.

Examples of Tax EVASION in Relation to Estates:

• Undervaluing Bequests: Undervaluing inherited assets or property on purpose to pay less in inheritance tax (IHT).

• Concealed Transfers: This involves transferring assets to trusts or family members without telling them to avoid paying IHT.

• False Valuations: Undervaluing or omitting Estate assets during probate to avoid paying inheritance tax is known as "falsified valuations."

• Omitted Gifts: Not disclosing gifts to beneficiaries or transferring assets under the table to avoid paying income tax (IHT).

Summary: The main characteristic of TAX EVASION STRATEGIES is that people and Estates attempt to reduce their tax obligations through deliberate, illegal intent to deceive or hide. 

SUMMARY

To prevent the potential for serious legal consequences in your tax dealings, whether personal tax or Estate-related matters, you must always be open and truthful in your tax declarations, regardless of whether they concern personal income or Estate assets.

When in Doubt, Consult a Tax Professional

It's always tempting to listen to advice from well-meaning associates and friends who turn out to be unqualified in tax matters. While their advice might resonate as correct, it might not be appropriate for your particular circumstances.

When in doubt, always consult a tax professional or your financial advisor for tax-related issues.

Need to know more?

You can also speak to a qualified estate planning company for a free initial consultation to discuss your options. Since we have the expertise to assess your Estate and understand your unique requirements, we can suggest appropriate lawful approaches for tax planning and estate administration, putting you in contact with our legal and tax experts where applicable.

Book a callback, and we'd be happy to arrange a no-cost, no-obligation discussion with you to lay out the options available.

Alternatively, call us on 01233 659 796.

Or reach out to us here.