Insights

Last year, HMRC collected £5.2bn in inheritance tax receipts, making this tax a significant source of revenues. The amount collected represented an 8% increase on the previous year, primarily due to the increasing value of property in London and the south east. If you have a valuable estate, you might be wondering what to do; what assets attract inheritance tax and how best to mitigate it. For example, a pension in drawdown is exempt, but annuities are not.  This article explains how to approach what is always a very emotive subject - IHT.

1. Make a will

Sounds obvious, but far fewer people are making wills than you would expect – 60% of people don’t have one – and yet it ensures that your assets will be distributed according to your wishes. Married couples are entitled to pass on £325,000 tax free and by 2020 a family home worth up to £1m jointly.

2. Give away small amounts

Anyone can make gifts of up to £3,000 each tax year which falls outside their estate immediately without it forming part of their 7 year ‘clock’. Additional gifts can also be made for special occasions – marriages for example – at a rate of £5,000 to a child or £2,500 to a grandchild.

If you don’t manage to use a gift allowance in a single tax year, it can be carried forward for one tax year only, creating a £6,000 entitlement in the next tax year. For a married couple, it can be possible to give away £12,000 without incurring any tax, and which falls outside your estate immediately.

Regular payments to friends and family can also be made out of income on an ongoing basis, provided it doesn’t affect the donor’s normal standard of living. It is important to maintain records of all gift payments made for future reference. For people with large incomes, regular gifting is probably one of the best ways to mitigate inheritance tax.

3. Make lifetime gifts

You can give away any amount to any individual and it is a potentially exempt transfer. This means no IHT is payable at the time of the gift and it falls outside your estate completely 7 years after it is made. In order to qualify, the gift must be absolute, and you must not enjoy any use of it after it is made.

4. Use trusts

Another good option, trusts are ideal when the donor wants to control how the assets are accessed in the future.  Whilst trusts can be useful for this purpose and for mitigating tax, the amounts which can be transferred into them without incurring a lifetime IHT charge are restricted and they can be expensive to administer, so advice is needed.

5. Maximise business assets 

Qualifying business assets such as shares in your own company, AIM listed shares and EIS approved business investments don’t attract inheritance tax in the same way as other assets and require only a 2 year holding period before they leave your estate for IHT purposes; provided they have been held for a minimum of 2 years at the time of death, they can qualify for business property relief (BPR). This is a special form of inheritance tax relief and can mean a reduction of either 50% or 100% in the amount of IHT payable.

Inheritance tax is a complex area and increasingly, HMRC are questioning situations where they have grounds to argue that tax planning arrangements have been made specifically to avoid paying tax. For example, a person gifting a family home but continuing to live in the property is quite common.

For a full review of your situation and consideration of the different IHT planning options available, please contact us.