How to beat Inheritance Tax in five easy moves
If you want your family to keep more of your estate when you die, then there are some simple ways to reduce the taxman’s take.
Despite the fact that more estates are paying Inheritance Tax (IHT), relatively few people understand the rules, and even those who do often forget or ignore ways to prevent their families paying over the odds. So, here’s a reminder of some IHT-reducing strategies to think about as we approach the end of the tax year.
1. Give to family members
One of the easiest, and potentially rewarding, ways to reduce a future IHT bill is to give some of your wealth away during your lifetime. You can give away up to £3,000 each tax year and not have to pay IHT on it. You can also make use of any unused gifting allowance from the previous tax year. So, a couple could potentially remove £12,000 from their joint estate before 5 April. Remember that last year’s allowance will be lost after that date.
The gifted money could be invested on behalf of a child or grandchild. For instance, you could contribute towards a child's Junior ISA, which could give them a head start and get them into the savings habit. The most they can save is subject to a £4,260 limit this tax year – an allowance that will be lost after 5 April.
You could also think about using the money to boost a child's retirement prospects. You can pay £2,880 a year into a child’s pension this tax year, and this will be grossed up to £3,600 by basic rate tax relief. Non-taxpayers cannot carry forward unused allowances, so this year’s opportunity will also be lost unless action is taken before the 5 April deadline.
Tax expert, Obi Nnochiri, explains the tax-saving opportunities on offer
2. Make gifts out of income
Those with sufficient surplus income may want to take account of the ‘normal expenditure out of income’ rule – if you make regular gifts out of income and in doing so don’t affect your standard of living, they are exempt from IHT. This exemption is only limited by your personal resources and the amount of spare income available to give away.
Keeping a record of who you made the gifts to, their value and the date they were made, should speed up the process of any checks made by HMRC. You could also consider establishing a standing order (e.g. to provide funds to pay for grandchildren’s school fees) as it supports the intent to make the gifts on a regular basis. If you can satisfy the conditions for the exemption, the gifts escape IHT as soon as they are made.
3. Place assets into trust
Assets that are placed into trust will be outside of your estate, provided you survive for seven years. So the use of trusts can potentially reduce an IHT bill. You can set up a trust right now or write one into your Will.* The rules are complicated, and there are anti-avoidance rules that must be navigated, so you should take advice from an expert.
4. Save more into your own pension
Saving into your own pension will avoid IHT at 40% which could be incurred were the same funds held elsewhere in your estate. This is because anything left in your pension can be paid as a lump sum or income to any beneficiary with absolutely no tax to pay if you die before the age of 75. If you are 75 or over when you die – and that is likely to be the case for most individuals – your heirs do pay Income Tax, but only when they take the money out. Even then, the tax is paid at their own marginal rate. So, maximising this year’s annual pension saving allowance should be on your list of potentially worthwhile estate planning options.**
5. Review your Will
Who you leave money to in your Will might affect whether or not IHT is payable. For example, money or property left to a spouse or registered civil partner does not attract IHT. But if your estate passes to a child, then IHT at 40% will normally have to be paid on anything over the £325,000 nil-rate band.
This means couples often leave everything to each other. However, you could make provisions to ensure that your nil-rate band legacy is left to your children, via a trust for example, with the rest of your estate going to your spouse or civil partner. This could ensure assets are passed to children and other loved ones without attracting IHT.
The value of an investment with St. James's Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief generally depends on individual circumstances.
* Will writing involves the referral to a service that is separate and distinct to those offered by St. James's Place. Wills and Trusts are not regulated by the Financial Conduct Authority.
** If you make a pension contribution while you are in serious ill health and don't survive to take your retirement benefits, there may be a tax charge to pay, as you may be deemed to have deliberately tried to avoid IHT. To reduce the possibility of a disagreement with HMRC, it is sensible to seek professional financial advice.