Reconsidering Inheritance Tax

Inheritance tax (IHT) is tax due on the estate upon someone’s death and is one of the most challenging taxes for those seeking to pass on their wealth. It’s charged at 40% above the personal allowance of £325,000 (nil rate band). There is no IHT liability if assets are either below the threshold or if assets are left to your spouse, civil partner or charity.

The total threshold can increase to £500,000 using the Residential nil rate band for passing your family home to your children or grandchildren and if your estate is worth less than £2 million.

Individuals can benefit from two nil rate bands and two residential nil rate bands, as allowances can be transferred between spouses as percentages on first death.

With the average house price constantly rising, if you think IHT planning is only for the wealthy – you might want to think again. Inheritance tax planning is one of the easiest ways to save money and make the most of what you have and there are a few routes you may want to consider:

Mitigating IHT liability

Spending money might sound a reasonable option but there are other options that should be explored.

1. Gifts

Anything of value such as money or property is classified as a gift. If an asset is sold at ‘family rates’, it can still fall under gifting if the transaction is not completed at market rates.

Exempted Gifts

Annual exemption of £3,000 worth of gifts applies within a tax year. One unused annual exemption can be carried to the following year. Each tax year, individuals can also:

• gift up to £1,000 per person (£2,500 for a grandchild or great-grandchild and £5,000 for a child) as wedding present
• gift out of surplus income
• make payments to help with living costs for an elderly or a child
• gift to charities or political parties – Total IHT rate can be reduced from 40% to 36% if at least 10% of their net estate is left to a charity
• make small gifts up to £250 per person

A 7-year rule applies for other larger gifts and can potentially be taxed on a sliding scale known as taper relief.

2. Trusts

Assets held in a trust are not usually considered part of your estate and are very useful to mitigate potential IHT liabilities. Trusts are basically legal structures to gift assets to third parties and still have control and duty of care over those assets for the beneficiaries. Please note that once assets are moved to a trust, they don’t belong to you (and hence do not form part of your estate upon death). There can be different types of Trusts, but they broadly fall into one of these two categories:

• Absolute trusts
• Discretionary trusts

Individual circumstances should be carefully examined before putting trusts in place as they can be complex to understand. 

3. Pensions

Pension pots can be used for tax efficiency as they can be passed as inheritance without being part of your estate. The important age to bear in mind is 75. If the death occurs before your 75^th birthday, pension funds usually can be passed without any tax liability. After 75, although there can be a tax charge depending on the beneficiary’s individual tax rate, it can be managed with some clever cash flow planning.

4. Business Relief

Claiming business relief can be a useful strategy to reduce IHT liabilities, by owning and holding assets for a minimum of 2 years in qualifying options. Investment options can include interest in a business, land, buildings, machinery or shares listed on the Alternative Investment Market (AIM). Investments can be high in risk and careful planning is advised. 

5. Life Insurance

Life insurance cannot reduce your IHT liability but can provide a lump sum benefit to pay for an IHT bill. Proceeds from an insurance policy written in trust will bypass the estate and can provide monetary sum to settle the tax bill.

Clever IHT planning can not only potentially save substantial amounts of your hard-earned money but can also provide peace of mind. Contact me for a no-obligation chat or more information