Chances are you’re not planning for your estate to suffer Inheritance Tax (IHT), but if you don’t plan, there’s a good chance it could happen, so here’s some things you can do right now to help minimise your IHT bill
IHT Is A Tax On Money Or Possessions You Leave Behind When You Die, And On Some Gifts You Make During Your Lifetime
An IHT Overview
IHT Raises Billions For The Treasury
Theresa May Hasn't Yet Given Her View On IHT, So Here's David Cameron's Opinion
We all want to see a system where it is only the very rich that pay Inheritance Tax, and not hard working people.
Prime Minister's Questions October 2014
Despite these intentions, an increasingly large number of people will leave their loved ones with a hefty tax bill when they die. Property price increases are dragging many middle class working families into the IHT bracket.
The Office for Budget Responsibility calculates that 4.8 per cent of the population currently pays IHT. By 2018-19, it estimates that figure will have more than doubled to 10 per cent.
Six Ways To Help Reduce IHT
When he was Chancellor of the Exchequer, Gordon Brown famously called IHT a ‘voluntary tax’ because he said there were many ways to avoid it. It is a true to say that with careful planning, it may be possible to either reduce your beneficiaries’ IHT bill or eliminate it altogether.
1. Make A Will
Effective estate planning starts by you making a Will. This ensures your assets are distributed in accordance with your wishes. It’s particularly important if you have a spouse or partner as there is no IHT payable between the two of you. It’s wrong to assume that if you don’t have a Will, all your assets will pass to your spouse or partner, as the illustration at the bottom of this article reveals.
2. Make Allowable Gifts
You can give cash or gifts worth up to £3,000 in total each tax year and these will be exempt from IHT when you die. You can even carry forward any unused part of the £3,000 exemption to the following year, but then you must use it or lose it. Parents can give cash or gifts worth up to £5,000 when a child gets married, grandparents up to £2,500 and anyone else up to £1,000. Small gifts of up to £250 a year can also be made to as many people as you like.
3. Give Away Assets
Parents are increasingly providing children with funds to help them buy their own home. This can be done through a gift and provided the parents survive for seven years after making it, the money automatically ends up outside their estate for IHT calculations, irrespective of size.
4. Make Use Of Trusts
If you put your assets in Trust, they no longer form part of your estate and therefore are not subject to IHT. There are many types of Trust available and they can be set up simply, sometimes at little cost. The Trust has to be set up with trustees whose role is to ensure that on your death, the investment is paid out according to your wishes. Depending on the type of Trust, it may be possible to unwind it in the event of a family crisis.
5. The Income Over Expenditure Rule
As well as putting lump sums into a Trust, you can also make regular contributions into certain savings vehicles and insurance policies and put them in Trust. The contributions are potentially subject to IHT but if you can prove these payments are not compromising your standard of living, they are exempt from IHT.
6. Provide For The Tax
If you're not in a position to take avoiding action, an alternative approach is to make provision for paying IHT when it is due. The most common approach is to take out a life assurance policy, written in Trust. The amount of cover should be equal to the expected IHT liability. On your death, the proceeds can then be used to pay any IHT, which falls due within six months of your death, without the need for your executors to borrow or sell other assets.
Further Information On IHT
Click the blue IHT buttons to read about IHT from a variety of different perspectives.
IHT Could Be Due If You Die Without Making A Will
The following illustration shows what could happen to your estate if you don't have a Will.
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.