Top 10 tips for saving Inheritance Tax (IHT)

If the total value of your assets exceeds the nil rate band of £325,000 then Inheritance Tax (IHT) at 40% could be due on your estate at the time of your death. Listed below are some ways to mitigate the tax liability payable by your family, or indeed, avoid it entirely.

  1. Making good use of the lifetime exemptions available is sound advice. The ‘annual exemption’ allows you to make gifts up to £3,000 per year; this limit applies to the person making the gift, not to each recipient. If last year’s exemption was unused it can be carried forward to the following year but no further. This doesn’t mean you can’t make gifts greater than these limits; it simply means that if you do, the excess over £3,000 will be subject to the seven year survivorship rule
  2. The ‘normal gifts out of income’ exemption is a valuable exemption which can save unlimited amounts of IHT. To qualify, the gifts must be paid from your income; therefore gifts of capital assets would not qualify. They must be ‘normal’ therefore some kind of pattern should be established and they must leave you with sufficient income to maintain your normal standard of living
  3. If you’ve been following Britain’s favourite costume drama Downton Abbey, you’ll be fully aware of the importance of making a Will. The distribution of Mathew Crawley’s estate shows just how precious that signed piece of paper can be and the impact it has on those you leave behind, both in terms of the succession of your assets and the IHT liability
  4. If you use up your nil rate band during your lifetime it becomes reinstated after a period of seven years therefore those with large estates should make use of the nil rate band every seven years
  5. Parents often worry about relinquishing their assets to the next generation due to risk factors such as divorce, immaturity or bankruptcy. This is where a family Trust can play a vital role in saving IHT yet providing greater security and control over the wealth that is gifted
  6. Death benefits payable from pension funds and life insurance policies payable into the estate of the policyholder may be subject to IHT. If your policy currently pays in to your estate it can easily be changed so that it pays into a trust for your family and the IHT saving is immediate
  7. The rate of IHT paid on your estate can be reduced from 40% to 36%. In order to qualify for the reduced rate you must leave at least 10% of the net value of your estate to a qualifying charity
  8. You can transfer any unused nil rate band from a late spouse or civil partner to the survivor. This can increase the nil rate band of the survivor to as much as £650,000. The executors need to send certain forms and supporting documents to HM Revenue & Customs to claim the extra relief. It is therefore vitally important that when the first death occurs all the details of the estate are clearly recorded and retained, even if no IHT is due, as it will be necessary at the time of the second death, to prove what happened
  9. It is a common misunderstanding that IHT can be avoided by signing over ownership of your home to your children whilst continuing to live there.  Unfortunately this does not work and the asset will remain in your estate for IHT purposes. This is called ‘reservation of benefit’ and can be avoided by paying a full market rent however often it is better to look at other planning opportunities rather than signing over ownership of your home
  10. Finally, without a doubt the most popular way to avoid IHT is to spend your money! Care still needs to be taken as spending your savings on property improvements, or a new car, will not save IHT because new items you buy will be taxable in your estate. Purchasing assets that will be exempt from IHT is good planning; such as business interests or agricultural property however you could just simply take that dream holiday you’ve always longed for!

Susan Winter, Senior Tax Consultant

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