As a starting point, every individual is entitled to a nil rate band, under which no inheritance tax is payable. For the current tax year, the nil rate band is £325,000. Any inheritable assets over that threshold figure can attract a tax of 40%, payable to HM Revenue & Customs.
There are however a number of steps, using exemptions and allowances that you can take to minimise this Inheritance Tax liability. Most of these are about ensuring that the threshold is not ultimately crossed, your wishes are fulfilled and intended beneficiaries do not miss out.
- A first step toward avoiding Inheritance Tax (IHT) could be by making a will, particularly if your partner or spouse is the intended main beneficiary. Put your affairs in order and don’t ignore the inevitability of your death!
- Consider making early gifts in the hope and expectation that you will live for seven years after any gift is made. Gifts made more than seven years before the donor dies are free of IHT. Search for ways of helping the younger generation to benefit, for example helping with school or university tuition fees.
- For some gifts to be IHT free, you don’t need to survive for seven years. Consider using smaller allowances such as the £3,000 per person annual allowance for gifts to anybody and the ability to give up to £5,000 to your children when they marry. This could be £5,000 from each parent to each adult child.
Discretionary trusts can be set up and enable assets up to the nil rate band of IHT of £325,000 per person, or £650,000 per married couple or civil partnership, to be sheltered from IHT, so long as the donor survives seven years. Unlike outright gifts, these trusts let donors retain control of the assets.
A habit of gifting may cut your IHT liability if you can show that such gifts are made out of income, are made on a regular basis and they do not reduce your own standard of living.
Consider becoming an agricultural landowner. In general, agricultural land which is let out can become IHT-free after seven years and could be IHT-free after two years if you farm it. Complex rules govern business property and agricultural land reliefs, so professional advice should always be taken.
If you have suffered injuries in the past during military service and this becomes a contributory factor to your death, then your estate may become IHT-free.
It is not possible to shelter your family home from IHT if you remain living in it, so another solution could be to spend some of the wealth in the asset before it can be taken into account for tax, for example via an equity release scheme.
Individual Savings Accounts (ISAs), whilst being popular ways of avoiding tax on income and gains from a wide variety of savings and investments, have no protection against IHT. Plans to minimise your IHT liability should include seeking to reduce any ISA component.
If you have substantial overseas assets, choosing a tax friendly location abroad where you wish to be buried may help you avoid IHT on those overseas assets. A somewhat drastic step to take, but where you intend to be buried can be deemed to be where you are domiciled and if domiciled overseas, only your assets based in the UK are subject to inheritance tax.
The information above has been prepared solely for the purpose of providing a basic introduction to IHT planning. When making an investment decision, you should always seek the advice of a professional financial adviser.