How to pay less inheritance tax
14 June 18  /  Insights

Inheritance tax is a deeply unpopular tax system, deemed by most to be unfair.

Understandably, many want to avoid inheritance as much as possible. Why should you pay thousands of pounds after spending years of hard earning, building up your wealth for it to not be given to who you want it to? Especially when considering you have paid tax throughout your entire working life.  

Whilst we cannot tell you how to completely avoid inheritance tax, we can reduce your inheritance tax bill by a few simple methods:

1. Gifts
Every year, each person is entitled to gift away £3,000 each tax year, exempt of inheritance tax, even if you die within 7 years of making the gift.

If you give nothing away in one tax year then you can bring that £3,000 forward from that year and give away £6,000 the next tax year without the risk of inheritance tax being due.

You may also make wedding gifts. You can give away up to £5,000 to your child and up to £2,500 to a grandchild or great-grandchild, or £1,000 to anyone else on their marriage. The gift is conditional to the wedding taking place.

You can also give away any number of small gifts up to £250 each to any number of people. However, these receivers of these gifts cannot also receive money from you under any other tax exemption.

2. Give money to charity
Anything left in your Will is completely exempt from Inheritance Tax if it is given to: a registered charity, university, national museum, an art gallery or a political party (subject to rules and regulations).

Leaving something for charity can reduce inheritance tax from 40% to 36%. You can be tax-effective with sound inheritance tax planning.

3. Pensions
If you nominate heirs to receive your pension fund and you pass away before you have chance to use it, the sum will be exempt from inheritance tax.

If you are under 75 when you die, your heirs can take the cash out and pay no tax. If you are 75 or more, then they can keep the money in a pension fund of their own. Or, they can take it out in cash or draw it out as an income. Either way it will be added to their income sum and taxed accordingly.

4. Business Property Relief
If a business or shares in an unlisted company are left, then no inheritance tax is due on them. Alternatively, half the value of land, buildings, or machinery used in a business by the deceased may also not subject to inheritance tax. In both cases, the person who has passed away must have owned the property for at least two years before death.

If the person is a sole trader then the relief is only given if the business will carry on trading.

Sometimes buying shares in unlisted companies is recommended, which also has other tax advantages. Like all shares, value can go both up and down.

5. Life Insurance
If you have a life insurance policy that pays out on your death, the money will normally form part of your estate.

You may avoid inheritance tax or reduce inheritance tax by including in your insurance policy that it is to form a Trust. This is then passed on to your dependants and not included as part of your estate.

However, this arrangement may be more difficult following recent changes in Trust law.

It is important to note that anything you give away, at least seven years prior to your death, is completely exempt from inheritance tax.

Additionally, from April 5th 2017, each person can claim an additional allowance of £100,000 on the sale of a family home on death, on top of their existing £325,000 inheritance tax exemption. This new tax allowance will rise to £175,000 by 2020.

The new allowance is only available when estates are directly inherited by children, stepchildren, adopted children or grandchildren. It will not apply if property is left to other family members.

It will also not be available when property has been left in a trust, which is why wills and trusts should be revised.

To find out more about inheritance tax planning or to discuss any concerns you may have, get in touch with one of our Lifestyle Financial Planners today by calling 01865 208012 or click here to email your enquiry.

Source: The Financial Times, 29th July 2016