Inheritance Tax Planning – what you need to know

Inheritance Tax can often be seen as the cruellest form of tax and can cost your loved-one’s thousands as assets accumulated over your life time that have been taxed, will be taxed once more after death.

IHT is a tax on chargeable transfers made during your lifetime and on the value of your estate after death.  

IHT can be a big burden as without the right planning, you could be passing on only 60% of your wealth to your chosen family members.

Therefore, it’s no surprise that taxpayers are now taking a greater interest in their IHT position and are taking steps to make sure they are better placed to protect their wealth for the future.

There are special rules that apply to trusts, non-UK domiciled individuals and various types of assets but for most taxpayers, they will want to consider the below as a starting point to reduce their IHT:

1.         Review your assets to check that they will qualify for relief

This is relevant for those who intend to rely on the generous Business Relief that normally exempts 100% of the value of qualifying assets. Following on from our ‘Types of business sale’ article, this relief is vital for ensuring a business can be passed to the next generation without an IHT liability arising.  Specific trading and ownership criteria need to be met to qualify.

2.         Make lifetime gifts

Lifetime gifts will be immediately exempt if they fall within the Annual Allowance (£3,000 pa) or Small Gift (£250 pa) exemptions.  Those with a large disposable income will want to consider whether they can qualify for the Normal Expenditure out of Income exemption which has no limit.  Larger lifetime gifts may also be appropriate as these fall out of account once the donor has survived for seven years from the date of the gift.

3.         Establish a Trust or Family Investment Company

For those who don’t wish to make outright gifts, the use of a structure such as a Trust or Family Investment Company may be appropriate. This can have the effect of removing wealth (and future growth) from your estate while still being able to have control over the assets, as well as offering an element of asset protection in the event of a failed business or relationship breakdown.

4.         Consider your pension pot

Pensions have become a valuable tool in passing on wealth.  For those with assets inside and out of a pension plan, they will want to consider whether it might be better to use non-pension assets rather than drawdown from their pension.

5.         Make a will

Making a will is one of the most essential things you can do to ensure your estate goes to who you want and that your wishes are carried out. Without a will, your estate will be distributed under the intestacy rules. This means that some of your estate could be subject to IHT, that could have been avoided with legitimate will planning.

6.         Invest in IHT efficient investments

Beyond traditional businesses, various assets attract relief from IHT.  Investing in certain investments such as AIM shares and farmland can attract 100% relief within a relatively short time period.  However, as with all investments, they can carry their own risk, so advice should be sought before investing.

7.         Take out insurance

If you take out an insurance policy, it won’t reduce the amount of IHT due on your estate, but the pay-out may make it easier for your family to pay the bill and perhaps prevent the family home from being sold. You must make sure the life insurance pay-out goes into a trust - if you don’t, it will only make your estate bigger and it will have to pay more tax.

If you'd like to get in touch about preparing your wealth and how to reduce your IHT payments, please fill in the form below.

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