With the Inheritance Tax (IHT) nil rate band having remained at £325,000 since 2009, more people than ever are having IHT charged on their estates on their death. Over £5.37 billion of IHT was paid to HMRC in the last tax year. This is almost double the amount that was collected ten years ago. With careful planning, it may be possible to reduce your future potential IHT liability significantly. Here are our five top tips for reducing your liability:
Legislation provides that you have a £3,000 'gift allowance' each year, known as your annual exemption. This means you can give away assets or cash up to a total of £3,000 in a tax year without it being added to the value of your estate for IHT purposes.
There are also additional allowances for gifts in contemplation of marriage. Any unused annual allowance from the previous tax year can be carried forward for one year. This means that if you made no lifetime gifts in the 2018/2019 tax year, you could make gifts of up to £6,000 in the 2019/2020 tax year.
Gifting surplus income is one of the less commonly known inheritance tax-reducing rules; however, it can result in a dramatic reduction in future tax liabilities. If your net income exceeds your annual outgoings, you may be able to give away the surplus income without any negative IHT consequences. Unlike the annual allowance, there is no limit put on how much can be given away using this method. What is more important is to show that the income given away is above that which is required by the gifter to support their lifestyle. Good record keeping is important to show this is the case.
Trusts have a variety of benefits and could be a very useful estate planning tool depending on your situation. Trusts provide a measure by which you can leave sums of money or property to beneficiaries, whilst still retaining a degree of control over how they use these assets. This can be of particular use when leaving assets to young children or those who are not yet financially responsible enough to receive significant sums of money.
Trusts also enable you to move parts of your estate away from being caught under your 'personal estate' for IHT purposes, so long as the trust has been constituted correctly in a tax-efficient way. This can have the effect of moving large sums away from your estate, which otherwise would have been taxable.
Pensions are one of the most flexible and tax-efficient vehicles for saving and passing on wealth. It is usually the case that pension pots can be passed on without attracting IHT. However, it is important to ensure that you have made appropriate nominations of your pensions, and all pension trust documents are correctly worded, to ensure your pension is passed on in the most tax-efficient manner.
Certain investments, such as those in AIM shares, business assets, and farming businesses attract significant IHT reliefs. Investing income in these types of investments can significantly reduce your future tax bill on your estate. However, they do come with their own risks; therefore you should seek advice before investing.
If this blog has raised any questions and you would like to discuss estate planning, please get in touch with Murray Beith Murray today using our Contact Form or call us on 0131 225 1200 to speak with one of our specialist solicitors.
Our personal, attentive service coupled with sage, astute and commercially-minded guidance, allows us to build long-term, ongoing relationships with our clients, helping them to protect assets throughout generations. We clearly outline the implications from initial contact, helping to dispel the mystery behind the law and legal process. Our highly personal service reflects our culture, which is centred on integrity and trust, and the expert guidance we provide has been designed to be an investment, not an expense.