Tax planning that leads to happy families

Mark Sheen suggests some simple ways to reduce your inheritance tax bill

The inheritance tax (“IHT”) allowance, above which you are liable for a payment of 40%, stands at £325,000 per person and has been frozen at that level since 2009. But since that time, the stock market has continued to rally and the housing market doesn’t appear to have slowed by any great extent, despite the recent introduction of a 3% surcharge in stamp duty land tax on second homes.

It therefore comes as no surprise that the Government’s IHT take has soared by more than 20%.  With almost 1,400 extra families being dragged into the IHT net, it’s increasingly important to take sensible steps to minimise the amount of tax due.

Here are some simple suggestions:

Make use of the seven-year rule

You can give away unlimited amounts of wealth – money or assets – to anyone, free of IHT, provided you survive for seven years after making the gift.  There must be no strings attached to the gift though. You cannot, for example, give away the family home while continuing to live in it, unless you are happy to pay a market rent for doing so.  If you fail to survive the gift by seven years, there may be a tax bill for the recipient, but, depending on the size of the gift, the tax due may taper away over the seven-year period.

Take out a life assurance policy

While it’s not necessarily a way to reduce tax, you can still reduce the impact of IHT on your estate by the use of a life assurance policy written in trust.  The policy provides an immediate sum of money on death to pay any IHT due, which means that more of your wealth is preserved for your beneficiaries and assets don’t have to be sold to pay the tax liability.

Use your gift allowances

You can make IHT-free gifts each year to anyone, provided that the total amount does not exceed £3,000, and you can also make small gifts of up to £250 to as many people as you wish.  You can make an IHT-free wedding gift of up to £5,000 to a child who is getting married, while a grandchild can receive up to £2,500 and anyone else £1,000.

Make regular gifts from income

Substantial amounts of money can be handed over free of IHT if you comply with certain rules regarding gifts.  They must be regular, made from income and not capital, and must not reduce your standard of living.

Buy shares in unlisted businesses

Shares in Enterprise Investment Scheme companies and shares in some small companies that are part of the Alternative Investment Market (AIM) qualify for Business Property Relief (BPR) if they’re held for at least two years before death.  This means there is no IHT to pay on their value.  You should take care when using this mechanism to reduce your IHT bill though, as investing in these types of company carries higher risk and not all AIM stocks qualify for BPR.

Pass on your pension pot

Passing on your pension pot to a beneficiary makes it free of IHT.  Also, if you die before the age of 75 there will be no income tax when the recipient starts drawing money from the pot.  If your death occurs when you’re 75 or over, there will be no IHT to pay, but the recipient will be taxed at their highest marginal rate when drawing an income.

Make a Will

This is especially important if you are part of an unmarried couple, because your partner will not receive anything on your death unless it is jointly owned.  If you don’t specify who gets what, your estate will be distributed according to the rules of intestacy, which may not be a true reflection of your wishes.

Remember charities in your Will

Bequests to charities are exempt from IHT and – if you leave 10% or more of your estate to charity – the IHT rate on the rest of your estate will be cut from 40% to 36%.

There is no one-size-fits-all solution when it comes to minimising IHT.  The suggestions above will go some way to helping you but, if you would like personalised advice on how to make sure as much of your wealth stays in the family as possible, it’s important to talk to your professional advisers.