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10 WAYS TO REDUCE YOUR INHERITANCE TAX BILL
by Sam Hulson of First Equitable
Inheritance Tax ( IHT ) is payable in the UK on death and sometimes when you give away certain assets during your lifetime . It can be a great concern for individuals with wealth exceeding the current £ 325,000 nil-rate band ( 2020 / 21 tax year ). Naturally , you ’ ll want to pass on as much as possible to your loved ones , rather than paying 40 % to HM Revenue & Customs ( HMRC ).
HERE ARE 10 TIPS TO PAY LESS OR AVOID INHERITANCE TAX
1 . POTENTIALLY EXEMPT TRANSFERS One of the better-known ways to pass on wealth free from IHT is to gift it more than seven years before your death . Of course , there is a degree of unpredictability in the outcome . If you were to die within seven years of making the gift , IHT may be charged , though the rate will be reduced if more than three years have passed .
2 . PERSONAL GIFTS Gifts up to a certain value can be made free from IHT , even in the last years of your life . Your allowance includes : large gifts totalling no more than £ 3,000 ; unlimited small gifts of up to £ 250 ; and wedding gifts of up to £ 5,000 for your children , £ 2,500 for your grandchildren , or £ 1,000 for others . Gifts made within your regular pattern of income and normal expenditure ( for example , quarterly payments towards a grandchild ’ s school fees from your annual income ) can usually be made free from IHT , although you may need to document this pattern for three or more years .
3 . CHARITABLE GIFTS Gifts to registered charities can be made entirely free from IHT , which can help you to reduce the size of your estate to within the IHT threshold . Additionally , if at least 10 % of your total estate is gifted to charity , it will reduce the rate of IHT payable on your remaining estate ( above the nil-rate band ) from 40 % to 36 %.
4 . INSURANCE It is possible to take out a life insurance policy written in an appropriate trust that can provide a lump sum on your death to be used to pay the resulting IHT bill . If this policy is within a trust , the lump sum paid out will not count towards your estate . Insurance can also be taken out when making large financial gifts to cover the IHT bill if you were to die within the following seven years ( for example , before they are excluded from your estate ). This is called a ‘ term assurance ’ policy .
5 . PENSIONS Typically , though with some exceptions , pensions are excluded from the calculation of your estate and can be passed on free from IHT . It is important to name a beneficiary to whom you wish to pass on your pension benefits . It is also possible to make payments in your lifetime into another person ’ s pension , which will protect this money from IHT . For example , you can set up a Junior Self-Invested Personal Pension for a grandchild under the age of 18 and pay in up to £ 2,880 a year . But they will not usually have access to this money until they reach age 55 .
6 . DISCRETIONARY TRUSTS A discretionary trust can help you to reduce your IHT liability by holding money in the name of your beneficiaries while you retain control . You can use your nil-rate band to pay in up to £ 325,000 , which will be excluded from your estate after seven years . Funds above the nil-rate band may attract a lifetime tax charge .
7 . LOAN TRUSTS If you would like to protect your money in a trust but need to know you can withdraw it if you need it , it ’ s possible to loan money to a trust . You will always have the option to withdraw the original capital you loaned , but any growth on that capital will be protected within the trust from IHT .
8 . DISCOUNTED GIFT TRUSTS If you would like to earmark some wealth to be passed to a beneficiary or beneficiaries on your death , but you want any income generated to be paid to you in your lifetime , you can do this through a discounted gift trust . This will exclude the contents of the trust from your estate for IHT purposes but still provide you with regular payments from it .
9 . BUSINESS RELIEF Business assets can usually be passed on either in your lifetime or after your death with IHT relief of up to 100 %. A business , interest in business or shares in an unlisted company will usually qualify for 100 % Business Relief . Land , buildings and machinery related to the business will usually qualify for 50 % Business Relief , as will shares controlling more than 50 % of the voting rights of a listed company .
10 . AGRICULTURAL RELIEF If you own agricultural property ( land or pasture used to grow crops or rear animals as part of a working farm ), this can usually be passed on in your lifetime or after your death free from IHT .
TIME TO PLAN YOUR ESTATE ? IHT planning can be a complicated process , as rules and legislation change regularly . But with the right planning , it is possible to significantly reduce or even eliminate a potential IHT liability . To identify the best ways to protect your assets for future generations , don ’ t delay . Contact us to discuss your options . You can also email me at : sam . hulson @ first-equitable . com
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