Inheritance Tax mitigation

Helping you protect your wealth is an important part of what we do, and one thing is certain, you need to plan to protect your wealth from a potential Inheritance Tax (IHT) liability. Once only the domain of the very wealthy, the wide-scale increase in home ownership and rising property values over the past decade have pushed many estates over the IHT threshold.

Your entire worldwide estate, including your property, savings, car, furniture and personal effects could be subject to IHT. This also includes all of your investments and life insurance policies and it is crucial that your life polices are held in an appropriate trust so they don’t add to the value of your estate.

IHT is levied on your estate after your death. The first £325,000 (£650,000 for couples) is tax-free but if the value of your assets is more than that, tax will be levied at 40 per cent.

Anything left to your spouse or civil partner is exempt from IHT. However, the value of those assets will form part of their estate on their death. If the first person’s IHT allowance isn’t used, the surviving spouse will have a double allowance.

You can gift up to £3,000 a year and it is immediately exempt from IHT, or £6,000 if you did not make a gift of this kind in the previous tax year. A married couple giving for the first time could, therefore, hand over £12,000
to their children in one year. After that, the maximum for a couple is £6,000.

You can also escape IHT by giving £250 to any number of people every year, but you cannot combine it with the above exemption. Parents can give £5,000 to each of their children as a wedding or civil partnership gift.

Grandparents can give £2,500 and anyone else £1,000. And if a gift is regular, comes out of income and does not affect your standard of living, any amount of money can be given away and ignored for IHT.

It is possible to make further tax-free gifts known as potentially exempt transfers (PETs), but you have to survive for seven years after making the gift. If you die within seven years and the gifts are valued at more than the nil-rate band threshold, you apply taper relief. The tax reduces on a sliding scale if the gift was made between three and seven years earlier.

You can give away most assets, including cash and shares. However, it has to be an outright gift from which you can no longer benefit. This excludes giving away your family home. If you hand it to your children and continue to live there, you have to pay a market rent, which can cancel out the tax benefits.

Loan trusts are designed for people who cannot give away assets because they need to live off the income but want future investment growth to be IHT-free. You make a payment to a trust, which is treated as an interest-free loan to the trustees. The trust then repays your loan capital in instalments, giving you an income. When you die, any outstanding loan forms part of your estate, but all investment growth is free from tax.

Levels and bases of and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor.