If you have an estate that is worth more than £325, 000, Inheritance Tax (IHT) of 40% is paid on the excess. You can pass on your estate to a spouse or civil partner completely tax-free on death. If you leave it to your children or others, they will not benefit in the same way.
April 2017 saw the government introduced the ‘main residence nil-rate band’ which started at £100,000 each and is increasing at £25,000 a year until it reaches £175,000 in 2020. So, it is currently £125,000 each in this tax year 2018/19.
This means individual homeowners can pass on an extra £125,000 IHT free. A total of £900,000 currently for a couple rising to £1 million by 2020. The government is not planning to review the current nil rate band of £325,000 until 2020/2021.
Tips to save paying Inheritance Tax.
Make a will
This is the most basic and cost-effective first step to saving IHT. Making a Will is often the most neglected step of estate planning. Without a will, your estate will be distributed according to set rules laid out by the government. This might mean that a larger portion of your estate goes to the taxman.
Start gifting your wealth away
You have an annual £3,000 tax-free gift allowance, known as the annual exemption. If you haven’t used your annual exemption fully in the previous year, you can combine it with your current year, but you can only go back one year.
Her Majesties Revenue and Customs (HMRC) say that a gift can be anything that has a value, such as money, property, possessions.
Your gifts may be a wedding or civil ceremony gifts of up to £1,000 per person. This increases to£2,500 for a grandchild or great-grandchild and £5,000 for a child.
Christmas and birthday presents are seen as normal gifts which are made out of your income. You need to be able to show that you able to maintain your standard of living after making the gift.
You can make payments to help with another person’s living costs, such as an elderly relative or a child under 18
Gifts to charities and political parties will also reduce the value of your estate. Leaving ten percent or more of your net estate to a charity may enable you to qualify for a reduced inheritance tax rate of 36%.
Gifting larger amounts.
As long as you live for at least seven years after giving the money away, there is no limit on how much you can give completely IHT free.
Make full use of your pension allowance
Pensions are a very effective way of passing on your wealth. They are free from IHT and can be passed on tax efficiently. Make sure that you are aware of all your pension allowances and use them.
Trusts have historically been a key tool for a financial planner in tax planning. They can be an effective way of reducing the value of your estate.
You need to remember that assets placed in trusts will only fall outside of your estate for IHT purposes if you live for at least seven years after setting up the trust. Trusts can be complicated and any decision you make may be irreversible. Take professional advice.
Invest in companies qualifying for Business Property Relief
If you invest in a business that qualifies for BPR for at least two years you can benefit from full IHT relief. Remember that you must be a shareholder on death to qualify.
Invest in an Alternative Investment Market IHT ISA
Individual Savings Accounts (ISAs) are tax-free during your lifetime. However on your death or when your spouse dies if that is later they form part of their estate and could be subject to 40% IHT. An alternative is by investing in certain AIM-listed companies which qualify for Business Property Relief (BPR) through your stock and shares ISA.
These ISAs must be held for over two years. After this time you could potentially pass on assets to anyone you wish without incurring an inheritance tax liability.
You can always SKI!
Why not reduce your tax bill by spending the money on yourself. Spending your kids’ inheritance (SKI) is very popular and enjoyable way to reduce the value of your estate. Remember to send me a postcard.
How Anstee & Co can help you reduce your Inheritance Tax.
IHT planning can be complex and the above points are a guide only. Why not arrange an appointment today with one of our expert financial planners.
Anstee & Co are Independent Financial Advisers (IFA’s). That means that they offer unbiased advice. They look at the whole of the financial market for solutions. Some financial firms will only offer a solution from a limited panel or recommend only their own products and services. They do not feel that this is giving you best advice.
Meetings can be arranged at your home. Alternatively, you can meet at their offices located at-
- Kettering, Northamptonshire
- Stamford, Lincolnshire
- Birmingham, West Midlands
- London, Central London
Their financial advisers also make use of meeting rooms in Droitwich, Warwick, Towcester, Northampton, Wellingborough and Bedford.