Inheritance Tax (IHT) can be a very useful planning scenario to be proactive with and make a significant difference to the people you plan to leave your estate to.
There are a number of ways to reduce the taxation on an estate on death, but some are easier to achieve than others. We will look at a few options available to individuals to try and reduce or eradicate an IHT bill. This is information only and naturally developing a holistic plan is important, that is where financial planning can help massively.
The first step is to understand your current circumstances.
- Work out your assets (and liabilities)
- What allowances you have. Known as Nil Rate Bands.
- Do you have a potential tax bill. Does your estate exceed the allowances?
- Are you expecting to receive an inheritance in the future?
Once you have started this process of planning then you can start to think about what you need for the future and in reserve. If you have a potential tax liability, then you can consider what options you have from some of the options below.
Make A Will
If your assets are not distributed with your wishes then there is a risk that intestacy rules are enforced on your estate, which may cause IHT unknowingly.
Interspousal transfer is free of taxation: If you transfer your assets in life or death to a spouse then there is no immediate taxation on that transfer. This includes two important factors when we consider IHT:
- Spousal transfer on death is exempt and the transfer of unused allowances is possible if the deceased has not used everything.
- Spousal transfer in life is not considered a gift or Potentially Exempt Transfer and would not be subject to the 7-year rule.
Make sure the right people receive your assets if you pass away!
Pensions
A pension (that is in trust) does not form part of your estate and is therefore not subject to IHT.
Although we accumulate our pension for retirement, it may be hugely beneficial to retain this and spend the other assets available to us, like cash or investments first. The pension is still available for access at any point, but you can retain the benefit of it, whilst not counting against your estate for IHT.
Gifting
There are allowances available that people can gift within, that are exempt from any calculation. Here is a list of these on the government website, clearly laid out:
https://www.gov.uk/inheritance-tax/gifts
If you gift beyond these allowances in your lifetime then these are known as potentially exempt transfers. Pass away within 7 years of the gift, then it will be included in your estate and start to use up your Nil Rate Band first. If the gifts exceed the Nil Rate Band, then potentially tax would be payable by the beneficiary of the gift.
If you survive 7 years after the gift, then this will be outside of your estate and exempt.
Trusts
Much like gifting, you can place funds into trust and if you survive the 7 years then it will be outside of your estate from a personal perspective.
Trusts can be very complicated but are also a potentially useful tool to remove assets from your estate but place them in an area where there is still control, if gifting directly is not appropriate.
Business Relief Qualifying Shares/Investments
An alternative potentially IHT exempt asset is BR qualifying investments. These are investments in high-risk small businesses that attract Business Relief. This qualifies the investment for IHT exemption 2 years after purchase. You would need to hold the investment until death, but the investment will be exempt all the time they continue to qualify.
There are tailor made portfolios targeting this BR benefit and providing an opportunity to invest, whilst diversifying the portfolio and minimising the risk, where possible.
You retain access to the funds and can withdraw at any time, but ultimately the intention is to hold the investments to death.
BR Qualifying Investments are not your standard investment and the relief is offered due to the potentially higher risk associated with the funds. We would recommend you seek financial advice before considering, to discuss the advantages and disadvantages for you specifically.
These are some of the areas that can help but as mentioned above it is important to have a plan to meet your specific needs. If you would like more information on any of the above, then please contact us to see if we can help you.