6th August 2019
If your estate has significant value, your beneficiaries may have to payInheritance Tax (IHT) on it when you pass away. With Inheritance Tax planning, you can minimise their tax liabilities and ensure your estate retains as much value as possible well into the future.
Can changing my Will reduce my Inheritance Tax bill?
Before you look at anything else, make sure you have an up-to-date Will. This will ensure that your estate is being divided exactly how you want, and that your wishes are being carried out after death.
We recommend taking a look at your Will, even if you already have one. There is a new type of IHT relief known as the ‘residence nil-rate band’. If your Will does not directly leave assets to descendants, you will not benefit from the new relief.
Take legal and independent financial advice to ensure your Will is as up-to-date and tax-efficient as possible.
Can I gift my estate to friends or family to reduce my Inheritance Tax bill?
Gifting parts of your estate – whether they be assets or money – to someone who is not your spouse or civil partner is considered as no longer benefiting you. When calculating IHT, the value of the gift will still be included in your estate for seven years after it was given.
This is why Inheritance Tax planning can be so valuable. If you gift a friend some money seven years before you pass away, the value of the gift will not be included in your Inheritance Tax calculations. Taper relief may be applied – this is relief determined by how many years after the gift was given that you passed away.
7 years between the gift and death put IHT relief at 100%, while 0-3 years between the gift and death will put relief at 60%. The years in between offer relief on a sliding scale. Speak to an independent financial adviser to understand taper relief and how it could affect your IHT liabilities.
There are limits on how much you can give away annually. Currently, you can give away:
- up to £3,000 per annum without incurring Inheritance Tax
- £250 to as many people as you like each year
- up to £5,000 to your children as a wedding gift (if you are a Parent)
- up to £2,500 as a wedding gift (if you are a Grandparent)
- up to £1,000 as a wedding gift (if you are neither of the above)
- gifts of any size to a political party or charity
Can I use my pension to reduce my Inheritance Tax bill?
Use your pension to pass on your wealth in a completely tax-free way. In the event that you pass away before the age of 75, any benefits you have left in a money purchase pension can be paid either as a drawdown pension or a lump sum to your beneficiaries, with no tax attached.
If you die after the age of 75, your pension payments will be taxed at the beneficiaries’ marginal income tax rate. Although pensions can be a fantastic way to lessen the weight of the IHT on your beneficiaries, other investments like Individual Savings Accounts (ISAs) can also provide a boost to your retirement income.
An added benefit to using pensions to reduce your Inheritance Tax bill is that as long as the funds remain in drawdown, they will remain IHT.
In essence, this means your pension could quite easily be passed onto your children and your grandchildren.
Will putting assets into a Trust reduce my Inheritance Tax bill?
You may benefit from putting some of your cash, property, or investments into a trust in order to distance them from your estate for Inheritance Tax purposes.
Using trusts may be a wise decision if you are worried about:
- Your children or grandchildren spending their inheritance unwisely
- Your children or grandchildren’s marital disputes complicating access to their legacy
- Your children or grandchildren losing access to their legacy if your spouse remarries
- Your Inheritance Tax bill being dependent on a large sum, which could otherwise be kept in a trust outside of the survivor’s estate
Be aware that trustees will often be liable for Income Tax at a rate of 45% and Capital Gains Tax (CGT) at 25%, so it is wise to speak to an independent financial adviser when looking at whether trusts are the best choice for you and your family.
How can I use shares to reduce my Inheritance Tax bill?
If you are interested in investing on the Alternative Investment Market (AIM), shares become free from IHT once you have held them for two years because they then qualify for Business Relief (BR).
Although investing in AIM shares requires careful thought, a recent success story from our firm exemplifies how they can be a lifesaver for estate holders looking to reduce the Inheritance Tax bill for their children.
Mrs H, aged 76 and recently widowed, came to us requiring advice on IHT planning with an estate valued at £3,300,000 and an Inheritance Tax liability of £640,000.
Upon consultation with Mrs H, we found she would be willing to gift £200,000 through a Discounted Gift Trust with the remaining money allocated to go into AIMs ISA, via ISA transfers, for Inheritance Tax purposes using Business Property Relief.
For Mrs H, having control of a proportion of the money invested is hugely important in case of future Long Term Care issues. Mitigating her Inheritance Liability is equally important. Within two years, her tax liability will have reduced by £200,000, leaving Mrs H delighted with the proposed investments as she does not want her son to have a large IHT liability in the future.
Who can help me reduce my Inheritance Tax bill?
Perspective (East Anglia) is a firm of experienced Financial Advisers, delivering a professional and specialised service to individuals and businesses throughout East Anglia and beyond.
If you are looking for ways to minimise your Inheritance Tax bill and maximise the value of your estate for generations to come, please speak to us today at firstname.lastname@example.org or call 01376 331800.