As Inheritance Tax (IHT) receipts continue to rocket, here's an informative video on how to slash your IHT burden, and a summary revealing ten ways to reduce or obliterate IHT altogether
In The Face Of Increasing IHT Receipts, There Are Many Things You Can Do To Avoid It
A Helpful Video On IHT And How To Avoid It
Increases in property values, rising stockmarkets and cash savings balances, together with the freezing of the IHT allowance since April 2009, have combined to push IHT receipts significantly higher.
Recent figures published by HMRC show that IHT receipts have grown 60 per cent over the last five years, from £2.9bn in 2011/12 to £4.7bn in 2015/16.
These figures are all the more confusing when you realise that IHT is largely a tax that can be avoided, if you take advantage of one or more of the many ways to reduce it.
Inheritance Tax is, broadly speaking, a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue.
Roy Jenkins in 1986
Former Chancellor of the Exchequer
I have much sympathy for Roy’s comment. More than 30 years ago, as a young financial adviser, I was asked to visit a couple to discuss ways to help them reduce the effect of Capital Transfer Tax, the forerunner of IHT.
As you’ll see below, giving your Estate away is one of the simplest methods to reduce your IHT bill. For if you no longer own an asset, your Estate won’t pay IHT on it. However, when I suggested this, the wife shouted at me as she stormed out of the room. Her husband immediately apologised for his wife’s aggressive behaviour, explaining that I’d inadvertently touched a raw nerve.
It seems a year or so earlier, with the wife’s blessing, her brother had persuaded their elderly mother to give him their mother’s very expensive flat overlooking the Seine in Paris, to avoid the equivalent French death tax. As soon as the deeds of the property were in his name, the brother kicked out his mother and sold the property, leaving his mother homeless and his sister with no inheritance!
Ten Ways To Reduce The Burden Of IHT
Pension funds are not subject to IHT. As a consequence, it's usually more tax efficient to spend your IHT-taxable assets first, leaving your tax-sheltered pension money protected from IHT.
1. Annual Exemption
In each tax year, you can gift up to £3,000, the IHT annual exemption per person. You can also carry forward any unused annual exemption from the previous tax year.
2. Gifts From Income
You can make regular gifts from your income completely free of IHT. Your gifts must be from your income after tax, and they must leave you with sufficient income to maintain your normal standard of living.
3. Marriage Gifts
Parents and grandparents can make one-off gifts on the marriage of children or grandchildren. The IHT-free limits are £5,000 (children) and £2,500 (grandchildren).
4. Small Gifts
In each tax year, you can gift up to £250 to any number of people completely free of IHT.
5. Donations To Charities And Political Parties
Donations to charities and political parties, either during your lifetime or via your Will are exempt from IHT.
6. Potentially Exempt Transfers
These are gifts in excess of the above. They will usually be free from IHT after seven years. If you die before seven years, the value of the gift will be added back to the value of your Estate and could suffer IHT, although a taper relief may apply.
7. Business Property Relief
If they are held for at least two years, certain assets qualify for 100 per cent Business Property Relief from IHT. This includes qualifying shares in unquoted trading companies. It can also include some shares listed on the Alternative Investment Market, and as these shares can be purchased in ISAs, it affords the potential for an IHT-free ISA account.
8. Enterprise Investment Scheme
Enterprise Investment Schemes enjoy similar IHT breaks to qualifying Alternative Investment Market shares, and they have Income Tax and Capital Gains Tax breaks as well.
9. Life Insurance
You can reduce the impact of IHT by using a life assurance policy written in trust. The death benefit of the policy is used to meet all or part of the IHT due, preserving your Estate for those you leave behind.
Charitable legacies written into a Will reduce the rate of IHT paid on your death. If 10 per cent of a taxable Estate is left to a registered charity (after allowing for the IHT threshold and other reliefs), the rate of IHT is reduced from 40 per cent to 36 per cent.
Further Information On IHT
You'll find all the rules about IHT on the HMRC website.
Please Share This
If you’ve found this page of interest, please would you kindly send a link to it to your friends and colleagues using the buttons below. You’ll be helping us out, and they might like it too. Thanks, it's much appreciated.
AJ Bell Is Often The Best Value SIPP For Stockmarket Assets
Over time, charges can wipe out a huge part of your fund. We like AJ Bell because there are no set-up costs. If you hold passive funds, which is our preference, or shares, investment trusts, EFTs, gilts or bonds, you pay one small fixed fee no matter how large your fund. And when you come to draw your benefits either as occasional drawdown or UFPLS payments, there's a small charge for the whole year no matter how many times you access your money (many SIPP and SSAS providers charge more than this for each payment). However, you should always compare charges in detail, because AJ Bell could be more expensive than other providers, depending on the type of stockmarket assets you hold.
Get Valuable SIPP And SSAS Insights Emailed Directly To Your Inbox Every Monday
As SIPPclub neither advises on, nor arranges, nor recommends specific investments or strategies, we're unable to say whether a SIPP or SSAS or any investment within it is right for you. Ultimately, it’s your money and your decision, and you should only proceed once you're satisfied you've undertaken sufficient due diligence. If you need advice, you should speak to your trusted adviser, or you could find a local adviser from Unbiased.co.uk. Alternatively, we'd be pleased to introduce to a suitably qualified independent financial adviser.
Please read our full Terms which includes criteria for SIPPclub membership.