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Seven things to consider if inheritance tax is a problem

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The rise of Britain's 'most hated' tax looks unstoppable: Traditionally inheritance tax (IHT) didn’t impact many people largely because the thresholds were set very high, but with rising house prices many more have now been dragged into the net and their estate could be subject to a hefty 40% tax charge on their death.


Indeed, the amount paid in IHT is now the highest it has ever been, having broken the £5 billion barrier in the last year for the first time.

Even the new rules introduced in April fall short of solving the problem. Couples could effectively be able to pass on as much as £1 million IHT free by 2020. But combine houses, investments and other assets and the amount of money HM Treasury collects from IHT is expected to continue to rise over the next five years, reaching £6.2 billion in 2022.

To keep your family’s finances as tax-efficient as possible, Alex Davies, CEO and founder of Wealth Club, outlines six principles to consider:

1. Making a will

Making a will is the most basic and simple estate planning measure one can take to minimise their inheritance tax liability. Despite this, nearly two-thirds of British adults do not have one in place, according to a YouGov survey.

The absence of a properly executed will would see your estate being processed according to the Rules of Intestacy upon death. This may mean a larger portion of your estate may go to the taxman.

2. Give tax-free gifts

You have an annual £3,000 tax-free gift allowance, known as the annual exemption. If you haven’t used your annual exemption fully in the previous year, you can combine it with your current year’s allowance. The money is immediately outside your estate so there will be no IHT to pay.

On top of to the annual £3,000 allowance, there is also a plethora of other ways to give money away tax-free.

You can give up to £250 each year to however many people you wish (but only one gift per recipient per year); you could make a wedding or civil ceremony gift to a family member (up for £1,000 per person, rising to £2,500 for a grandchild or £5,000 for a great-grandchild).

Another is to leave 10% or more of your net estate to a charity, which may enable you to qualify for a reduced inheritance tax rate of 36%.

3. Make larger gifts

You can make gifts of unlimited value to whomever you wish and they could be IHT free. But there is catch: for your estate to benefit from full IHT relief you must live at least another seven years after giving the money away. This is a complicated area, so getting some professional advice is sensible.

4. Set up a trust

Trusts are traditionally a staple of estate planning. Simply put, when you put cash, property or investments into a trust, those assets are effectively no longer yours – they belong to the trust. A trustee (someone you choose) will look after for the eventual beneficiary, your children for example.

Trusts can be very effective at reducing the value of your estate and therefore the potential IHT charge. On the flip side, the relevant tax and general law are complex and any decision you make may be irreversible. It’s not something you would arrange yourself: you’d need specialist advice. As with large gifts, assets placed in trust will only fall outside of your estate for IHT purposes if you live for at least seven years after establishing the trust.

5. Make sure your ISA is IHT free

ISAs are tax free during your lifetime but when you die, or when your spouse dies if later, they could be subject to 40% Inheritance Tax.

An effective way to avoid this happening is to invest in certain AIM listed companies via your stock and shares ISA. You have to hold the shares for at least two years; after which you could potentially pass on assets to whomever you wish without a penny due in inheritance tax.

6. Review your pension provisions

Pensions have historically been one of the most tax efficient ways to save for retirement. They can also be surprisingly efficient when it comes to inheritance tax. If you die before 75 the money in your pension can be passed to whomever you nominate completely tax free. If you die after 75 in most cases your beneficiaries will only have to pay income tax on what they take out of the pension.

7. Consider an IHT portfolio to retain full control of your assets

An IHT portfolio is effectively a managed portfolio of companies that qualify for Business Property Relief (BPR).

BPR was originally introduced to allow entrepreneurs to pass their business down through generations without incurring an IHT liability. The scope of BPR is now wider so it is possible to benefit from the IHT exemption even if you’re not the business owner, but simply an investor in a BPR-qualifying company.

The Octopus Inheritance Tax Service is one example through which you could achieve BPR relief. Octopus deploys money into three areas: renewable energy, lending in property and construction in healthcare.

Drafting in an IHT planning specialist may be wise since qualifying rules are complex and an IHT portfolio carries high risks in returns for great rewards.

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