Inheritance Tax Tips

Last month we published an article about the increasing receipts the Government are receiving from Inheritance Tax (IHT).

This month we are concentrating our efforts on some planning opportunities that can reduce the IHT payable by your estate and therefore enhance the inheritance received by your beneficiaries.


Idea 1 – Make use of exemptions

Every individual is entitled to a £3,000 annual exemption which allows them to give away £3,000 in any one tax year without such a gift being included in the calculation of the IHT payable if they die within seven years of making the gift.

In addition, if you have not used the previous year’s allowance, you can also use this allowance but the current year’s exemption must be used first, so a gift of £6,000 may be permissible in one year.

In addition, you can make small gifts (up to £250) to as many people as you like in a tax year. However, the total gift must be equal to or less than £250.

Gifts on the occasion of marriage can also be exempt. The amount of exemption depends upon your relationship to the person being married.


Idea 2 – Make gifts of out of income

If you can show that you have excessive income, then gifts of income above your requirements are exempt gifts for IHT purposes.

If for example, your income is £5,000 per month and your bills, personal expenditure such as meals out, holidays, clothing etc are £3,000 per month, then you should be able to give away up to £2,000 per month using this exemption.

It is critical to show that the gifts do not impact upon your standard of living and record keeping will be key. It is also preferable to establish a regular pattern about such gifts to avoid HMRC challenges.


Idea 3 – Make gifts to exempt beneficiaries

You can make exempt gifts to certain people and bodies.

These include gifts to UK charities and political parties, gifts to institutions such as museums and universities and of course gifts to your spouse!

Unfortunately, gifts to a common law spouse or partner are not exempt!


Idea 4 – Gift a large amount and live for seven years....

Of course, no one can predict when they are going to die but if you have a good feeling about the next seven years, then you could consider making a large gift now and assuming that you survive seven years, then the value of the gift will not be included in the calculation of your estate.

If you die within the seven years, then the value of the gift will be brought into the calculation of your estate for IHT purposes but if you pass away after three years of making the gift, the IHT is reduced on a sliding scale depending upon the length of time you survived.


Idea 5 – Make use of trusts and family investment companies

If you don’t like the idea of losing control of an asset (idea 4) but want to make a gift for IHT purposes then you could set up either a trust or family investment company both of which would allow you to retain an element of control over the underlying asset.

There can be other tax implications when an asset is transferred into such a vehicle and also tax implications when the asset comes out of the vehicle, so we would need to consider these before any planning is carried out but the use of such vehicles should not be discounted.


Idea 6 – Spend it!

Fancy that new car? Or that dream holiday? Well why not let the taxman fund 40% of it......

If you are in the position whereby IHT will be payable when you die (say you are unmarried and have an estate worth £1m), then for every £10,000 spent, the taxman would suffer an IHT ‘loss’ of £4,000. Thus that £20,000 “Around the World” cruise only costs your estate, and therefore your beneficiaries, £12,000  - £20,000 x 60%.

In addition to saving tax, you’ll also (hopefully) enjoy spending your well earned monies!

If you decide to buy that sports car, then the value of the car will still be brought into the calculation of the value of your estate when you pass away but assuming that you have time to enjoy it, the value is likely to be significantly reduced from the original cost!


Idea 7 – Take out cover

You could of course take out a life policy which pays out a lump sum on death to cover the IHT payable.

It is key to ensure that the funds paid out are paid into trust, so that the funds are outside of your estate for IHT purposes.

Our colleagues at Clive Owen Wealth Management can help set up such a policy.


Idea 8 – Update your Will

When was the last time you reviewed your Will? What might have changed since then?

Certainly there have been many changes in the law in recent years (such as the introduction of the new exemption for the family home) and you may wish to change your intended beneficiaries due to family fall outs, death of beneficiaries, destruction of assets etc.

It is important to undertake regular Will reviews to ensure that your assets pass to your chosen beneficiaries.

If you don’t have a Will, we would urge you to rectify the position as soon as possible.

If you need to speak to our tax experts, then for Darlington call Alan Moore or Lee Watson (01325 349700), for Durham call Nicola Bellerby or Lee Watson (0191 384 2244) and for York call Alan Moore or Graham Richardson (01904 784400).