No-one likes paying tax, but it’s a fact of life. However when it comes to inheritance tax, it seems doubly unfair. After all you’ve probably already been taxed on a lot of the value in your estate, why should you pay tax again?
Well we’re committed to reducing the inheritance tax burden of our clients, and have worked alongside many of them to mitigate or even wipe out their tax bill altogether.
To help you with this aim we have compiled our top ten list of IHT savings:
- Make lifetime gifts. If you don’t need the asset or income from it to live on then we recommend you give it away sooner rather than later. Gifts to individuals are potentially exempt, and completely exempt if you live 7 years from the date of gift. Beware capital gains tax if the asset is property or shares, so seek advice before gifting. If you do survive 7 years after the gift you’ll save 40% of the value transferred.
- Invest in unquoted or AIM listed shares. Holdings in unquoted or AIM listed shares qualify for business property relief, and are therefore free from IHT if held for 2 years. Although these investments are riskier than other types they can be very attractive for the tax savings involved. You can use a fund manager to spread your risk across a number of companies. If you invest under the Enterprise Investment Scheme there are great income tax and capital gains tax advantages too.
- Make IHT friendly investments. For those who are keen to reduce their IHT bill but need to keep full access to their investments there are IHT solutions such as discounted gift trusts. These products will usually exempt a proportion of the investment from IHT, the amount depends on your age and health, but you can continue to take payments from the investment.
- Pass your property down the bloodline. If your will leaves your home or other residence to your direct descendants you may qualify for an additional nil rate band of £150,000. That means potential tax savings of £60,000 per person or £120,000 per couple! There are lots of conditions applying to this relief, including the overall value of your estate, so do seek advice about how you can secure this valuable tax saving.
- Make sure your life insurance policies are written in trust. If life policies are not written in trust they will form part of the estate value at probate and could therefore be taxed at 40%. It is worth checking all policies you have. If they are not written in trust already it is a simple form filling exercise to convert them.
- Take out life insurance to pay the IHT. Although it won’t save tax as such, having a life insurance policy that pays out on death is a great way of funding the tax bill and ensuring your estate passes intact to your beneficiaries.
- Invest in pensions. Pension funds are generally exempt from IHT, so monies that you put into your pension pot will not only qualify for income tax relief but will then sit in an IHT free environment. As pensions are far more flexible than they used to be your pot should be available to pass straight to your beneficiaries on your death. There may be tax charges involved if the recipient wants to take the funds out, depending on your age at death, so advice should always be taken before doing so.
- Make gifts out of income. One ‘problem’ people often have as they get older is that their monthly income exceeds their monthly expenditure – maybe because they can no longer go on expensive holidays. If this happens the excess lies in their estate and may be subject to 40% tax on death. What they could do is set up a standing order for the excess income to be transferred to their family. That way their estate doesn’t get bigger and they can see the family enjoy their gifts. Those regular gifts out of income are completely free from IHT and can be used on top of other lifetime gifts, such as the annual exemption of £3,000 and small gift relief of £250 per person.
- Gift money to charity. All legacies to charities in your will are completely exempt from IHT (this also applies to donations to political parties). In addition if you leave at least 10% of your estate to charity the remainder of the estate will be taxed at 36% rather than 40%.
- And finally….spend your money! This is the best, and potentially the most enjoyable way to make sure the tax man doesn’t get his hands on your wealth. Do make sure you leave enough capital to live on though!
If you would like further advice about any of the information in this article please contact Jan Friend.
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The content in this blog is correct as at 31/10/2019. See terms and conditions.