THe most unpopular of all taxes
Still regarded by advisers as a voluntary tax but one that can significantly reduce the value of your estate passed on to loved ones. In the UK, estates above the nil-rate band (currently £325,000 per person with additional allowances for married couples and certain gifts) may be subject to 40% tax. Careful planning can help mitigate this liability and preserve wealth for your beneficiaries.
Gifting Assets
One of the most common strategies you'll see on social media is to make gifts during your lifetime. Gifts made more than seven years before death are generally exempt from IHT. There are also annual exemptions, such as the £3,000 annual gift allowance per person and small gift exemptions for up to £250 per recipient. Gifts to spouses or charities are usually exempt from IHT as well. Strategic gifting can gradually reduce the taxable value of your estate, but it’s important to ensure you retain enough assets to meet your living needs and trying to mitigate IHT just using these gifts can be described as nibbling around the edge of a problem.
Using Allowances
In addition to the standard nil-rate band, there are specific allowances and reliefs. For example, the residence nil-rate band (and extra £175,000 of relief under certain circumstances) applies when passing on a home to children or grandchildren. Utilising these allowances with lifetime gifts and other planning strategies can reduce IHT exposure.
The FOUR main approaches to IHT mitigation:
- Pay it...
This is the most commonly adopted strategy and happens by default if planning isn't done in advance; and planning takes time, effort and costs money so that's why 80% of estate with a liability end up simply paying the tax - lucky HMRC
- Get someone else to pay it...
Whole of life insurance is very useful tool for IHT mitigation. For couples, a Joint Life, Second Death policy can be taken out - if you can afford it - and when placed in a properly structured life insurance trust, the policy pays out on death directly to Trustees, outside of the estate.
This can provide funds specifically to cover IHT liabilities, preventing the forced sale of assets such as property or investments.
- Don't Own it...
Sounds easy, just gift it away. One of the most common strategies you'll see on social media to grab your attention is to use the allowable annual gift allowances during your lifetime - £3,000 here, £250 there - but just using these gifts can be described as nibbling around the edge of a problem. To make an impact on an estate needs proper planning. For example, you can't gift your house to your children and still live in it (unless they do, too) because HMRC will view this as a Gift with Reservation of Benefit (GROB) and giving assets away can take up to 7 years to fully leave your estate. Also, if you gift large chunks of cash away, will you leave yourself short or could those chunks of money being snaffled by third parties?
One way to keep IHT in check is to make sure your assets don't grow any larger. More difficult with property, but if your cash savings or investments are growing, by giving away surplus income (if structured properly) you can be immediately move money you don't need out of your estate.
- Own Assets in a tax efficient manner...
Another strategy is swapping assets into those more favourable for IHT. For instance, replacing cash savings with certain investments that qualify for reliefs, or transferring assets into trusts, can remove them from your taxable estate. Some Discretionary trusts, for example, give immediate relief and allow assets to be managed for beneficiaries while reducing their inclusion in your estate for IHT purposes. Other specialised investments attract IHT relief if held for just two years, and work very well - although they usually come with an element of risk..
Final Thoughts
IHT mitigation seems to be very much top of people's list these days (we are with you on that), however, the one thing that will dilute what your Beneficiaries are able to enjoy far more than inheritance tax will is when assets are taken away from your loved ones due to instances you can't control, such as the divorce of a Beneficiary. That, and many other risks that you can't forsee happening but do happen every day to families, are easily prevented - you just need a Protective Will
