Inheritance tax (IHT) is payable at 40% on your taxable estate. IHT receipts were projected to be in excess of £3.4 billion in 2014/15 (ONS figures for 2013/14), with rising property and share prices and a nil rate band (NRB) of £325,000 that has not increased since 2009.
IHT savings measures are under constant attack. Deeds of variation are now under scrutiny and the government is considering limiting any IHT savings that may result from such a variation. Consultations have also been mooted on limiting the number of nil rate bands an individual or trust can have to one only – the initial attempt to propose this change was scuttled some months ago, but it seems that the government is not giving up.
How then do we defeat Inheritance Tax?
Here is a selection of ideas, subject to personal circumstances:
- Make a will and make sure it is clear who will benefit from you. Relying on a deed of variation in future years may not be effective.
- Do the sums and establish what the IHT position will be if you died now. Each person has £325,000 free of IHT, and married couples/civil partners could have up to £650,000 between them, as the unused NRB on the first death is transferable to the survivor.
- If married or in a civil partnership, at least delay IHT by leaving your estate to your spouse who is generally exempt from IHT. This can be left directly or in trust for the spouse.
- You can use the 100% spouse exemption and also make use of your unused nil rate band by leaving its’ assets worth to others. That way you can pass assets to others worth £325,000, and use the spouse exemption on any balance.
- Be aware that the first ten year anniversary for periodic charges at up to 6% on trusts with chargeable assets will become payable (for example) in 2016 if a trust was formed in 2006.
- You can legitimately reduce your estate by making gifts to others. Gifts within the annual exemption of £3,000; gifts in consideration of marriage within certain limits; gifts up to £250 to any person; any excess income over normal expenditure may be gifted, as may unlimited gifts to charities and political parties; lifetime gifts to a spouse are generally free of IHT. Larger gifts outside of these allowances may also be made, and provided you survive for seven years, will generally be out of your estate.
- Leaving at least 10% of your estate to charity can reduce the IHT tax charge on death from 40% to 36%.
- Arrange your assets so that they become IHT free. Enterprise investment scheme (EIS) and seed EIS investments after two years are generally IHT free; woodlands investments can be 100% free of IHT under the business property relief (BPR) rules. Discounted gift trusts can provide lifelong income and be tax-efficient – a proportion is immediately out of your estate.
- Do not lose valuable BPR or agricultural property relief. For example, private trading company shares can be 100% free of IHT. However, if the company has large cash reserves you may lose BPR. Decide early on whether to sell your shares (if so you lose the BPR relief) or to bequeath them and retain the reliefs. Director’s loan accounts are subject to IHT at 40% on death.
- Pension assets can be built up free of IHT. However beware taking lump sums for re-investment that may become inheritance taxable. Also ensure that pension death benefits are discretionary otherwise they could still fall into your estate for IHT purposes.
- Ensure that all life assurance is written into trust to avoid IHT on the proceeds.
Practical Tip :
Those with business and personal assets can save thousands in IHT if they plan properly. It is not too late to change life policies to pay into trust. Protect director’s loan accounts and other assets from IHT. As always, where IHT planning involves pensions, savings and/or investments, always seek suitable professional advice based on your particular circumstances.
