Nothing is certain but death and taxes, so goes the saying. And while there’s nothing at all any of us can do about the former, the inheritance tax burden that would be triggered by your passing can most certainly be mitigated and possibly eliminated altogether. All it takes is some good, professional legal and financial advice and some careful forward planning.
Let’s start at the beginning – or the end, as it were. When you die, the Government calculates the net worth of the estate you leave behind, which includes:
- Cash in the bank
- Property assets
- Business assets
- Life insurance payouts
Currently, your heirs will have to pay Inheritance Tax at the rate of 40% on anything above the threshold of £325,000.
From April 2017, a new tax free ‘main residence’ band will be introduced as part of the Family Home Allowance (FHA), to be phased in over 4 years. It only applies to the main residence and where the beneficiary is a direct descendant of the deceased. Starting at £100,000 in 2017, the FHA will increase gradually until it reaches £175,000 in 2020. This means that from 2020, family homes up to the value of £500,000 will effectively be protected from IHT – or £1 million on the death of the second spouse. If you’re not sure how this would apply to your particular situation, you may wish to talk it through with an experienced private client solicitor.
The new IHT regulations are welcome news, of course, but what if it’s not enough? If you are looking for ways to reduce your tax exposure and protect your wealth for the sake of your family, here are a few ideas worth thinking about.
1) Make a gift to your partner
If you are married or in a civil partnership, you are free to make a gift (of any value) to your spouse or partner. You can use this mechanism to reduce your estate’s value to below the IHT threshold, eliminating any tax risk.
2) Make a gift to family or friends
You are, of course, also free to make a gift (of any value) to anyone who is not your spouse or partner. However, in that case the monetary value of the gift will still form part of your estate for the next 7 years, although progressive tax relief does apply from 3 years onwards. See here for details.
For example, if you decide to gift your house to your son and you then pass away 2 years later, the value of the house will be taken into account for the purposes of calculating any inheritance tax liability. However, if you live for longer than the designated 7-year period after making the gift, you’re in the clear. The gift will then be outside of your estate.
You can also make an annual tax free gift of up to £3,000 in addition to special gifts such as wedding gifts for your children or grandchildren.
3) Set up a trust
Trusts are a great way to shelter your estate from IHT exposure. You could put money into a trust to pay for your grandchildren’s school fees, or support a disabled family member. Trusts can be set up at any time, though there may be a Capital Gains Tax (CGT) liability on certain assets transferred into a trust while you are alive – do check with your solicitor. There is no such liability if you establish a trust in your Will. Trusts are not for the faint hearted, and definitely not something you should try to do yourself. There are many complicated rules best left to an experienced solicitor to deal with.
4) Give to charity
Whatever you leave to a charity will not incur any IHT, so this can be a useful way to cut your tax bill while doing some good at the same time. What’s more, if you leave at least 10% of your entire estate to charity, the rest of your estate will benefit from a lower IHT rate (36%).
5) Take out life insurance
Setting up a whole-of-life insurance policy, written in trust, means that when the policy pays out it will reduce your estate by the value of the policy. In effect, is gives your heirs a lump sum that can be used to pay some or all of the tax bill. The key is to put the life insurance in trust, otherwise it will increase the size of your estate and have the opposite effect of what you intended to happen!
6) Enterprise Investment Scheme (EIS)
Established tax incentives such as the EIS encourages people to invest in smaller private companies and receive 30% income tax relief after shares have been held for 3 years. You can invest up to £1 million per year. After 2 years of share ownership, your investment will qualify for business property relief, meaning it will be excluded from your IHT liability.
If this is of interest to you, make sure you discuss the finer details with a good financial adviser or investment lawyer.
Article provided by Mike James, an independent content writer in the finance industry working together with personal injury law firm George Ide, who were consulted over the information in this post.…