Inheritance Tax (IHT) is the least popular tax in the UK according to a YouGov poll. The Nil-Rate Band, the amount up to which an estate has no IHT to pay, has remained static at £325,000 since 2009. The introduction of the additional Residence Nil-Rate Band, currently £125,000, is intended to help pass the family home to children. But, property prices have grown significantly over the last ten years.
More and more inheriting families are being stung by the tax. But, within the current rules, there are opportunities to possibly mitigate it altogether. Here’s how:
1. Organise your will
Around 60% of people are yet to write a will. That’s 32 million people in total, as confirmed by the latest statistics from Unbiased. Writing a will is essential and should always be a priority when estate planning. Dying without one means you have no control over how your assets are distributed. But, it could also create an entirely avoidable IHT bill. Wills should be reviewed and kept up to date to ensure they remain relevant.
2. Calculate your potential liability
The value of property across the UK has risen considerably since 2009. After so many years of accelerated growth, it’s not unusual to be liable for IHT. Other assets to consider include cash, investment portfolios, cars, second homes, watches, jewellery and life insurance pay-outs that are not written in Trust to a particular person. Any debt would be repaid before calculating IHT, including mortgages and credit card bills.
The Nil-Rate Band is £325,000 and the Residence Nil-Rate Band is £125,000, totalling £450,000 per person. Transfers between married and civil partnership couples are exempt from IHT and unused Nil-Rate Bands passed to the surviving spouse. Therefore, the total potential exemption is £900,000. Even in this circumstance, many estates can exceed the threshold.
3. Gifts and gifting from excess income
A gift of any value is exempt from IHT as long as the person making it lives for seven years after. If they die during that time, the value of gifts would be included in their estate. Regardless of timescale, people can gift up to £3,000 a year which is immediately exempt from IHT.
Making ‘gifts out of income’ is another exemption, but to qualify the gift must form part of an individual’s normal expenditure, be made out of income and cannot reduce their standard of living. It’s important to keep documentation of income and expenditure as proof in this circumstance.
4. Use trusts
It’s possible to pass ownership of assets such as cash, investments or property by placing them in trust. There are numerous types of trust available, which one is appropriate for you will depend on individual circumstances. Not all trusts are exempt from IHT, some are subject to their own Inheritance Tax regimes, as well as potential income and Capital Gains Tax. We would always recommend talking to a financial planner before exploring this option as it can be quite complex.
It is also possible to write insurance policies in trust. This means they are immediately paid to the nominated beneficiary upon death, rather than becoming part of your estate and considered for IHT.
5. Maximise pension contributions
Generally speaking, pensions are exempt from IHT. By making the most of tax-efficient pension allowances you will not only be saving towards retirement but effectively minimising your potential liability. You must nominate a beneficiary with the pension scheme administrators, and ensure that person remains appropriate over time.
6. Business Relief and AIM portfolios
Business Relief is designed to pass some business assets or an interest in a business on free of IHT. Shares in an unlisted company also qualify for 100% IHT relief. Shares and investments listed on the Alternative Investment Market (AIM) qualify as ‘unlisted’. There are numerous AIM portfolios specifically designed to mitigate IHT, which can also be held in an ISA (Individual Savings Account).
There is one limitation: Business Relief is only available if you have owned the asset for at least two years before you die. Furthermore, AIM portfolios are not without risk and we would always recommend seeking advice if this option appeals to you.
7. Insure against a liability
When planning for a potential liability that is unable to be mitigated, it is possible to take out a life insurance policy to pay the bill. This should be placed in trust, so it’s not inadvertently added to the estate value on death, which would increase your IHT liability.
8. Make charitable donations
All charitable giving is free of tax and Gift Aid adds an extra incentive. Any amount donated in your will won’t be counted towards the estate for IHT. But better still, if 10% or more of your estate is left to charity then you will qualify for a discounted IHT rate of 36%, instead of the usual 40%. That could be a significant saving made, whilst helping a charity you value.
9. Spend it!
There was recently a report from the Financial Conduct Authority (FCA) stating that pensioners aren’t spending enough, dying with a significant amount of assets. Christopher Woolard from the FCA explained that: “Far from blowing their pension savings on Lamborghinis and lavish holidays, we’re seeing people penny-pinching because they’re trying to make their pot last for longer than is probably necessary.” Going without in later life, leaving unspent funds and potentially creating a tax bill, is a huge waste of resources.
On the other hand, research in the past has shown that people tend to underestimate their lifespan by as much as eight years. That would have an incredibly negative impact on the sustainability of retirement income. Whether spending too much or too little, understanding your longevity and utilising cashflow planning will help secure your financial future.
10. Seek advice
The best thing anyone can do when IHT planning is to engage an experienced, well-qualified financial adviser. We can guide you through every step of the financial planning process. This ensures the financial decisions you make lead to a happy, stable and fulfilling future for you and your family.
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