Inheritance tax is an insidious, loathsome and spiteful tax designed to rob you even as you are knocking at St Peter’s gates.

Under the current legislation, if upon your demise, your estate is worth in excess of £285,000 then the excess is subject to inheritance tax at 40%

 

Who Is Affected ?

In the past it was the more affluent sections of society that were caught up by inheritance tax. These were not only people with a huge amount of money, but also middle class folk who through financial diligence over the years had managed to afford a nice house, that appreciated over time.

Times have changed, however, and most of us will now probably be caught up and be liable to pay inheritance tax when we die. This change is mostly due to the rapid rise in property prices over the past few years coupled with the fact that the threshold at which inheritance tax is payable, has not risen in line with house price inflation.

If on average, your home is worth £250,000 (and a great many houses easily are these days), and you also have even a moderate amount of savings, a moderate private pension and a few nice possessions, you will almost certainly be in the inheritance tax ‘zone’.

Strategies To Minimise Inheritance Tax

Inheritance tax is sometimes called a ‘voluntary tax’ because there are in fact, some strategies that you can use to minimise your liability, or even escape the tax altogether.

Make Gifts To Your Children - Probably the easiest and most trouble free way of sidestepping inheritance tax. If you have savings that are liquid and will not be needed in the future, you can pass them on to your children without incurring an IHT liability. The same is also true of amounts over £3,000 as long as you survive for seven years after the gift has been made.

You are also permitted to make REGULAR tax free gifts from any income that you may have, as long as this does not diminish your standard of living.PLEASE NOTE: Do not be caught out by the ‘gift with reservation’ rule. This is when, for example, you give your home to your children, but actually continue to live there. As this is deemed a gift in ‘name only’ any gifts so given will still form part of your estate on your death, and thus be taxable. You must also be aware of new rules on ‘pre-owned assets’. In essence these regulations make you liable for income tax on any asset that you derived a benefit from that was formerly yours.

Set Up A Trust – You will certainly need a solicitor to do this for you. Basically, instead of gifting cash to your children on your demise, you and your partner leave your shares of your house (up to the taxable threshold) to a discretionary trust. The most basic explanation of a trust is that it is a legal vehicle where the trustees (who can certainly be family members), hold money or possessions on behalf of the trusts’ beneficiaries.

On the death of the first partner, the trustees inherit this share but sell it to the surviving partner in return for an undertaking to pay the trust on their demise.

On the death of the surviving partner, the trust is paid back from the estate, thus reducing inheritance tax.

It is also possible to place some of your investments into a trust for a specific purpose, for example, to pay for a child’s university fees. It must be noted, however, that due to the running costs of this type of trust, this will only be worthwhile if you have over £100,000 to put in.

Take Out An Insurance Policy

Instead of giving away any of your assets before your demise, you could take out a life insurance policy to counteract your inheritance tax liability. You could have the policy ‘written in trust’ for your children, and upon your death, this would be theirs, rather than part of your estate, and thus not liable for IHT. If you are going to go down this route you MUST ENSURE that you instruct your insurer that the policy is to be written in trust.

As you will have deduced, this is not actually an inheritance tax avoidance strategy, rather it is designed to mitigate the effects of the tax. It is nonetheless, very effective.

What Should I do Now ?

In this short article, I have only outlined some of the strategies used to avoid IHT and there are quite a few more that can be used very effectively. The Government, however, constantly likes to tinker with the rules and if you are seriously looking for ways not to let the state get hold of the wealth that you took a lifetime to create, then you should contact one of the many firms that specialise in IHT. They will safely guide you through the process and will be aware of any ‘closed loopholes’ that you can no longer utilise. 

As I mentioned previously, inheritance tax is a ‘voluntary tax’ inasmuch as if you make the effort, you won’t have to hand to the Government, what should belong to your children. I wish you well.