Inheritance tax is a tax that is imposed on the estate of a deceased person. It is a complex area of taxation and can be difficult to understand. In the United Kingdom, inheritance tax is charged at 40% on the value of an estate over £325,000. This means that if the value of an estate is greater than this amount, the beneficiaries of the estate will be liable for inheritance tax.
Fortunately, there are ways to reduce or even avoid inheritance tax altogether. One such way is through the use of a deed of covenant. A deed of covenant is a legal document that sets out an agreement between two parties. In this case, it is an agreement between the deceased person and their beneficiaries. The agreement states that the beneficiaries will receive a certain amount of money from the deceased person's estate in exchange for agreeing to pay any inheritance tax that may be due on the estate.
This means that if the value of the estate is greater than £325,000, the beneficiaries will be liable for any inheritance tax due on the estate. The advantage of using a deed of covenant is that it can reduce or even eliminate inheritance tax liability. This is because the amount of money that is paid by the beneficiaries to cover any inheritance tax due on the estate will be less than the amount they would have to pay if they were liable for inheritance tax themselves. This means that they can save money and still receive their inheritance. It is important to note that a deed of covenant must be set up correctly in order for it to be effective. It must be drafted by a qualified solicitor and must meet all legal requirements.
It must also be signed by both parties and witnessed by an independent third party. Once it has been set up correctly, it can be used to reduce or even avoid inheritance tax. In summary, a deed of covenant can be used to reduce or even avoid inheritance tax liability. It is important to ensure that it is set up correctly in order to be effective. If done correctly, it can save money and still allow beneficiaries to receive their inheritance.
