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Eight steps to inheritance tax heaven

Updated 01 December 2022

4min read

Nick Green
Financial Journalist

Inheritance tax has been hitting the headlines thanks to the Government’s announcement on a new £1m threshold. Stuart Dewin of Questa Chartered reveals how, with careful planning, you can limit how much your beneficiaries will have to pay even with the new changes from 2017.

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There’s no doubt that a shake-up on the inheritance tax threshold was long overdue but it doesn’t mean that planning for it can be put on the backburner.

Unlike other forms of taxation, inheritance tax is essentially voluntary. Let’s face it – why would you want to pay additional tax on your hard-earned assets, which in all likelihood have already been taxed at least once already? Yet many people do allow this to happen, when they needn’t.

Inheritance tax (IHT) is currently charged at 40 per cent on an individual’s estate above a £325,000 threshold (£650,000 for a married couple). With that set to change from 2017, find out more about the new phased threshold and read our eight simple tips to get for sound inheritance tax planning.

  1. Make a will

Dying intestate (i.e. without a will) means your estate will be divided out by the government in a pre-set formula. By writing a will and naming your beneficiaries, you put yourself in control.

Seek professional legal advice and ensure that you address a range of potential scenarios, and make sure the will is kept up to date. Life changing events such as divorce, marriage and the birth of grandchildren are likely to have a big impact, so keep checking that the will is still in line with your wishes.

  1. Know what you’ve got

It’s important to have a thorough understanding of what your assets are. Rising property prices over the last 20 years have been sweeping more and more people into the IHT net although with the Chancellor’s recent announcement, that starts to change from April 2017.

Currently, if you combine the total value of your property, investments and cash, everything over the £325,000 mark is taxable at 40 per cent.

However, in last week’s summer Budget announcement, George Osborne announced the introduction of a ‘family home allowance,’ worth up to £175,000 per person on top of the existing £325,000 tax-free allowance.

The allowance will be transferable and phased in at a rate of up to £100,000 from April 2017 to £175,000 by 2020/21.

It means individuals will be able to pass on £500,000 free from inheritance tax, making the total for couples £1m.

  1. Rack up those quick wins

There are many kinds of gifts you can make in your lifetime which provide immediate exemptions from IHT. Make full use of these as often as possible and you’ll steadily reduce your taxable estate.

  • Gift £3,000 a year to an individual. If you have not gifted in the previous year you can carry that allowance forward and gift £6,000 in total.
  • Gift £250 to an unlimited number of individuals, except to those who have already received £3,000 from you.
  • Give wedding gifts: £5,000 to your own child, £2,500 to a grandchild and £1,000 to a friend are all exempt.
  • Gifts to charities are also exempt.
  • Regular gifts of money that does not form part of your ‘normal expenditure’. You can give a regular sum of money to someone as long as you show that giving it to them does not affect your standard of living. The money has to be from a regular income such as a salary or pension income – it cannot be derived from capital assets (e.g. money in the bank or investments). There is no limit on this.
  1. Potentially exempt gifts and trusts

A larger gift of money can still be exempt, provided that you do not die within seven years of making it. If you do die within seven years, the gift will be liable to inheritance tax – so give wisely.

The gift can be cash, property or any item of value, such as a car or a piece of art. Any growth in value of the gift is also free from inheritance tax.

Alternatively, you can stay in control of your assets without giving them away by putting them in a trust. This moves them outside your taxable estate. By naming yourself as the trustee, you retain an element of control.

  1. Use an insurance policy

If you don’t want to ‘gift’ your estate away, a useful alternative is an insurance policy that pays out the IHT liabilities. Place the policy in a trust so it does not form part of your estate and can be easily accessed outside the probate process.

Note that IHT liabilities have to be paid within six months of death and there is no access to the bequeathed estate until the tax has been paid. If no IHT planning has taken place, most people have to resort to a bank loan to pay this liability. An insurance policy is generally a preferable way to cover this cost.

The downside of using an insurance policy is that they can be expensive, and the cost increases in line with age and conditions such as illness.

  1. Invest in assets that qualify for Business Property Relief

If you invest in shares on the Alternative Investment Market (AIM) you can gift them under a two-year rule instead of a seven-year rule (see above). This is a short-term quick fix, but it reflects the fact that AIM shares can be more risky.

  1. Use your pension as a tax shelter

Following pension freedom, pension pots are not subject to IHT. If you die before the age of 75, any remaining pension pot can be passed onto your beneficiaries tax free.

  1. Seek independent financial advice

Finally, be sure to consult an independent financial adviser for help with your estate planning. Your adviser can help you focus on exactly what you want to achieve and how best do it – so you’re not just giving assets away for the sake of avoiding tax, but genuinely helping those whom you care about.

About the author

Stuart Dewin is a Chartered Financial Planner and a Fellow of the Chartered Insurance Institute. He is also a Certified Financial Planner and an affiliate of the Society of Trust and Estate Practitioners.

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About the author
Nick Green is a financial journalist writing for Unbiased.co.uk, the site that has helped over 10 million people find financial, business and legal advice. Nick has been writing professionally on money and business topics for over 15 years, and has previously written for leading accountancy firms PKF and BDO.