The inheritance tax (“IHT”) allowance, above which inheritance tax of 40% is payable, stands at £325,000 per person and has been frozenat that level since 2009.
Since that time the stock market has continued to rally and the housing market doesn’t appear to have slowed by any great extent, despite the recent introduction of a 3% surcharge in stamp duty land tax on second homes.
It therefore comes as no surprise that the Government’s IHT take soared by more than 20% last year. With almost 1,400 extra families being dragged into the IHT net, it’s increasingly important to take steps to minimise the amount of tax due.
Here are our simple suggestions:
- Make use of the seven-year rule
You can give away unlimited amounts of wealth – money or assets – to anyone, free of IHT, provided you survive for seven years after making the gift. There must be no strings attached to the gift so, for example, you cannot give away the family home while continuing to live in it, unless you are happy to pay a market rent for doing so. If you fail to survive the gift by seven years, there may be a tax bill for the recipient, but, depending on the size of the gift, the tax due may taper away over the seven-year period.
- Take out a life assurance policy
Whilst not necessarily a way to reduce the tax due, if you don’t want to change your lifestyle or give away your wealth, you can still reduce the impact of IHT on your estate by the use of a life assurance policy written in trust. The policy provides an immediate sum of money on death to pay any IHT due, which means that more of your wealth is preserved for your beneficiaries and assets don’t have to be sold to pay inheritance tax.
- Use your gift allowances
You can make IHT-free gifts each year to anyone, provided that the total amount does not exceed £3,000, and you can also make small gifts of up to £250 to as many people as you wish. You can make an IHT-free wedding gift of up to £5,000 to a child who is getting married, while a grandchild can receive up to £2,500 and anyone else £1,000.
- Make regular gifts from income
Substantial amounts of money can be handed over free of IHT if certain rules regarding gifts are complied with. Gifts must be regular, made from income and not capital, and must not reduce your standard of living.
- Buy shares in unlisted businesses
Shares in Enterprise Investment Scheme companies and shares in some small companies that are part of the Alternative Investment Market (AIM) qualify for Business Property Relief (BPR) if they’re held for at least two years before death. This means there is no IHT to pay on their value. Care needs to be taken when using this mechanism to reduce your IHT bill as investing in these types of company carries higher risk and not all AIM stocks qualify for BPR.
- Pass on your pension pot
Passing on your pension pot to a beneficiary makes it free of IHT. Also, if you die before the age of 75 there will be no income tax when the recipient starts drawing money from the pot. If death occurs at age 75 or over, there will be no IHT to pay but the recipient will be taxed at their highest marginal rate when drawing an income.
- Make a Will
This is especially important if you are part of an unmarried couple, because your partner will not receive anything on your death unless it is jointly owned. If you don’t specify who gets what, your estate will be distributed according to the rules of intestacy, which may not be a true reflection of your wishes.
- Remember charities in your Will
Bequests to charities are exempt from IHT and, if you leave 10% or more of your estate to charity, the IHT rate on the rest of your estate will be cut from 40% to 36%.
There is no one size fits all solution when it comes to minimising IHT. Our suggestions above will go some way to helping you but, if you would like personalised advice on how to make sure as much of your wealth stays in the family as possible, we would be delighted to discuss this with you.