Inheritance Tax was once a hot topic of conversation and a battleground for the two main political parties who each fought to be seen on the side of ‘Middle England’.
Over recent months and years however it seems to have fallen off the front pages as the recession, inflation and pensions have taken over, but IHT is still around and many estates still pay it.
We thought we would revisit this area and look at some ways in which, through basic financial planning, your estate could reduce or even wipe out any liability to IHT.
1. Calculate your liability
The first stage is to calculate whether you have an Inheritance Tax (IHT) liability in the first place.
Each individual has a ‘nil rate band’ currently £325,000 in the current tax year, below which IHT is not payable. There is also a series of exemptions and allowances, more of which later, that can reduce an estate’s IHT liability.
Furthermore the changes introduced by the last government, which allowed your spouse’s unused ‘nil rate band’ to be transferred to you, took many estates out of the IHT bracket. More information about transferring ‘nil rate bands’ can be found on the HMRC website .
Most IFAs will be happy to calculate this for you; alternatively you could do it yourself by using information and calculators available on the internet.
2. Make a Will
Perhaps the simplest piece of advice and yet the one action many of us “have not got round to yet”.
A Will can help to take away confusion and uncertainty at the time of death, especially with regard to dependent children. It can also help avoid the often misunderstood rules of intestacy which themselves can lead to an immediate IHT bill.
A local solicitor can draw up a Will cheaply and expertly, you could also take advantage of the various Will schemes run by local charities.
3. Maximise exemptions and reliefs
There are certain exemptions and reliefs that you can take advantage of which will help to reduce any IHT liability.
For example each individual can gift up to £3,000 in a single year and it is immediately exempt from your estate for IHT purposes, as are any gifts to charity or gifts from parents up to £5,000 and grandparents up to £2,500 in consideration of marriage.
Furthermore any regular gifts you make out of your after-tax income, not including your capital, are exempt from IHT.
Learn more about the various exemptions and reliefs by visiting the HMRC website .
4. Businesses Property Relief (BPR)
For many people in business a significant proportion of their estate can come from the value of their business.
Many businesses, whether they are a limited company, under sole ownership or a partnership qualify for business property relief, which in a nutshell means that, subject to certain rules, the value is excluded from the estate when assessing whether IHT is due.
Your accountant or IFA will be able to review your business and confirm whether BPR applies, if it doesn’t they will be able to discuss with you options to change the structure of your business so that it does apply.
5. The family home
For most people their main residence makes up a significant proportion of their estate. Over the years there have been many schemes designed to remove the family home from the estate for IHT purposes. Recent times have seen such schemes be attacked more by HMRC; however there are still steps which can be taken to remove the main residence from any IHT calculation.
They include giving the house to your children and buying back the lifetime right to live there, alternatively one spouse could sell their interest to the other spouse in return for an IOU which could then be gifted to children.
The main message with regard to the family house is that discussion about removing it from the estate isn’t off limits and it should be considered, It is however generally considered to be a last resort and the need for expert advice cannot be over emphasised, nor the need to look at the advantages and disadvantages of each course of action.
6. Arrange investments in tax efficient way
Many people wish to retain control over the way in which their money is invested and there are a number of ways in which investments can be structured to improve their efficiency with regard to IHT whilst giving you control over the investment decisions.
An example of one such method is the use of a Discounted Gift Trust.
There are also certain types of investment such which make use of existing reliefs and exemptions, for example Business Property Relief or Forestry. Such investments are complex and can be high risk. Before proceeding with such an investment expert advice is vital, it is also important not to make an investment which does not meet your attitude to risk just because it offers tax advantages.
7. Use insurance
For one reason or another the main methods of avoiding IHT may not apply to you, or the disadvantages associated with a particular course of action may be unacceptable.
In such circumstances one option to consider is the use of a Whole of Life insurance policy to meet any IHT bill. Basically, the IHT liability is calculated and then a policy is taken out, generally in joint names, by a husband and wife which pays out a lump sum on 2nd death equal to the tax liability. The lump sum payout is then used by the estate to meet the IHT bill leaving the assets to be passed to the beneficiaries of the estate in full.
Using such insurance can often be one of the simplest ways of dealing with the problem of IHT, clearly it does not remove it like other methods may do, it simply provides a way of financing any liability.
There is of course a cost associated with buying insurance, however because it is written on a second death basis this may be less than you think. Again an IFA can discuss the pros and cons of this route as well as providing you with exact costings and also advice on the use of a suitable trust which is a vital part of this type of arrangement.
Historically Inheritance Tax was sometimes referred to as a voluntary tax, meaning that there were so many ways to avoid paying IHT it was almost voluntary whether you did pay it or not. Times have moved on and many ‘loop holes’ have been changed or been removed altogether, however with careful planning and expert advice your estate’s liability can be significantly reduced.