Inheritance Tax

7 Ways to save Inheritance tax

Make a Will

An important element of sound estate planning is to make a Will – unfortunately 70 per cent of adults with children under 18 fail to do so.

This is mainly due to apathy but also a result of the fact that many of us are uncomfortable talking about issues surrounding our death. Making a Will ensures your assets are distributed in accordance with your wishes.

This is particularly important if you have a spouse or partner as there is no inheritance tax payable between the two of you but there could be tax payable if you die intestate – without a will – and assets end up going to other relatives.

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 inheritance tax when you die.

You can 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 inheritance tax calculations – irrespective of size.

4. Make use of trusts

Assets can be put in trust, thereby no longer forming part of the estate.

There are many types of trust available and can be set up simply at little or no charge. They usually involve parents (called settlors) investing a sum of money into a trust. The trust has to be set up with trustees – a suggested minimum of two – whose role is to ensure that on the death of the settlors the investment is paid out according to the settlors’ wishes. In most cases this will be to children or grandchildren.

5. The income over expenditure rule

As well as putting lump sums into a trust you can also make monthly contributions into certain savings or insurance policies (not Isas) and put them in trust.

The monthly contributions are potentially subject to inheritance tax but if you can prove that these payments are not compromising your standard of living they are exempt.

6. Invest in Business Property Relief Products

These are very effective and can save your estate a great deal of IHT. Unfortunately they are not great for capital growth but they are useful for capital preservation. You can also give these directly to your children or grandchildren without attracting IHT. In effect taking them out of your estate without any liability.

However, you can not raise debt on other assets in order to invest in a BPR product. You should talk to your IFA to find out which are the best products in the marketplace, which have consistently done well.

7. Provide for the tax

If you are not in a position to take avoiding action, an alternative approach is to make provision for paying inheritance tax when it is due.

The tax has to be paid within six months of death (interest is added after this time). Because probate must be granted before any money can be released from an estate the executor – usually a son or daughter – will often have to borrow money or use their own funds to pay the inheritance tax bill.

This is where life assurance policies written in trust come into their own. A life assurance policy is taken out on both a husband’s and wife’s life with the proceeds payable only on second death.

The amount of cover should be equal to the expected inheritance tax liability. By putting the policy in trust it means it does not form part of the estate.

The proceeds can then be used to pay any inheritance tax bill straightaway without the need for the executors to borrow.

Please contact me on [email protected] or 0207 041 6069 to find out how I can best help you protect your family and your assets.

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IFAs: Pensions and Inheritance Tax?

It is important when giving advice on Pensions that the client is aware how this sits with Inheritance Tax Planning.

Regulations concerning pensions have changed. Many of the changes concern Income Tax but the subject of Inheritance Tax (“IHT”) is something that should not be overlooked.

Pension policies where benefits have not yet been taken?

Under the new rules it is worth considering that leaving funds in a pension fund at your death could improve your Inheritance tax situation, particularly in comparison with taking out the pension where it could be subject to 40% IHT.

Would Inheritance Tax have to be paid on a payout, if you should die before pension benefits have been taken?

Generally, pension death benefits paid out – including under “Drawdown facilities” – will not be subject to Inheritance Tax in the Estate of the Scheme member where they are payable under an Occupational Pension Scheme or a “Personal Pension Scheme”. This is provided lump sum benefits are paid out within two years of the death, or any Drawdown has commenced within that time.

Under these schemes, the Pension Scheme Administrator normally has an element of discretion as to the recipient of the Death Benefits (often backed up by a non-binding nomination or “letter of wishes”).

However, the pension benefits could be caught for Inheritance Tax in the following circumstances:

The Pension benefits have to be paid into the Estate of the pension scheme member; for example if the only “person nominated” has already died before the Scheme member; or

The pension scheme document gives the member the power to make an irrevocable “binding nomination” to direct where the proceeds will be paid.

The element of discretion will not in that case be available to the Scheme Administrator, and the death benefits will potentially attract Inheritance Tax.

What about “Retirement Annuity” Pension schemes

Lump Sum Pension benefits from “Retirement Annuity” Schemes taken out prior to 1 July 1988, and “Section 32” deferred annuity contracts are usually paid into the Estate of the pension scheme member, and will then be subject to Inheritance Tax.

What can I do if I am caught by this?

A way out of this is to set up a separate trust, perhaps using a solicitor, and the Pension Scheme death benefits would be paid into this trust. The member would choose the trustees, and would specify their own preferred beneficiaries. The pension benefits can then be passed to the next generation free of Inheritance Tax.

If this applies to me, can I make a change at any time?

HMRC generally accept that changing the Pension Death Benefits has a nominal effect for IHT purposes if they are in good health when the transfer or assignment takes place.

If the pension scheme member dies within two years of making such a change, the Personal representatives will have to report this to HMRC on form IHT409, and IHT may become payable.