How to take the sting out of inheritance tax thousands of pounds and save your family

Britons paid a massive £5.2billion last year as household wealth rose. So here’s how to avoid it...

INHERITANCE tax is feared by many and understood by few. Unfortunately, a mix of rising property prices, greater household wealth, inertia and ignorance, are resulting in more families being caught out by this brutal levy. The latest data from the Revenue indicates that inheritance tax receipts totalled £5.2 billion in the tax year to April 2018 and are on course to hit a record £6.5 billion in the current tax year.

This is despite some ameliorating measures already introduced by the Government to help families shield more of their assets from the tax – and a promise from Ministers to make the inheritance regime less baffling and more user-friendly. Ideas for possible reform could be published as soon as this spring.

But with Labour threatening to tax inherited wealth even more spitefully if it ever seizes power, it is key that households start looking now to protect as much of their assets from the taxman as they possibly can. So, last week we asked a panel of leading financial experts for ideas on how families can draw the sting from the tail of inheritance tax. Surprisingly, most of the measures recommended are simple to implement, but could end up saving some families many thousands of pounds.

As Ian Dyall, head of estate planning at wealth manager Tilney, says: ‘In reality, inheritance tax is a voluntary tax that can more times than not be avoided with some forward planning. Sadly, more people are sleepwalking into it, sometimes for no other reason than the fact that they do not want to think about their eventual demise.’

PLAN AHEAD TO REDUCE IHT THREAT

PLANNING ahead may not be everybody’s cup of tea but it is key to mitigating the threat of inheritance tax.

Claire Trott, head of pensions strategy at wealth manager St James’s Place, says: ‘While it is never too soon to start thinking about wealth protection, it can often be too late. With a little bit of planning and some expert guidance, you can add some certainty to your financial future – and ensure your loved ones are not left to clear up a financial mess and pay a hefty tax bill.’

It is essential to draw up a will. Although not necessarily a tax mitigating move, it will ensure your assets are passed on to those people – beneficiaries – whom you want to benefit from your kindness. Dying intestate – without a will – means your assets will be divided according to prescribed rules, not your wishes.

Dyall says: ‘Everyone should have a will although research we recently carried out indicates that nearly 60 per cent of the public do not have one. From an inheritance tax perspective, if you leave money to a charity in a will, it will not count towards the value of your estate. It is surely better to leave money to the causes you care about, rather t han t he Chancellor of t he Exchequer.’

GIFTING WILL KEEP TAXMAN AT BAY

THE simplest way to reduce a future inheritance bill is through gifting – usually money or personal possessions. A whole series of gifting allowances currently exist although these may be streamlined in the future as part of the Government’s commitment to simplify the tax regime.

So the annual exemption allows a maximum of £3,000 to be gifted every tax year – among as many people as you want. If you fail to use it this tax year, you can carry it forward to the new tax year starting April 6, meaning you can then gift £ 6,000, exempt from inheritance tax.

Patrick Connolly, a chartered financial planner with Chase de Vere, says: ‘A married couple giving for the first time could in theory hand over £12,000 to their children in one year, reducing the value of their estate by the same sum.’

Gifts can also be made to children, grandchildren or friends who get married – a maximum of £5,000, £ 2, 500 and £ 1, 000 respectively.

There is also scope to make a series of additional small gifts, up to £250 per person in any one tax year. The only restriction is that the gift cannot be made to someone who has already received a gift from you under a different exemption in the same tax year (the annual exemption for example). Gifts can also be

made to charities and, if you are so minded, political parties. On top, regular gifts can be made out of income provided they do not end up compromising your standard of living. So, for example, a grandparent could use spare income to help pay a grandchild’s school fees or fund a pension or Junior Isa for them. Connolly says for those with large incomes, this regular gifting facility can make a ‘significant difference’ to their potential inherit- ance tax liability. Finally, further gifts called ‘potentially exempt transfers’ – typically cash and shares – are permitted, but to be free of inheritance tax you need to survive for at least seven years. This could prove useful – again – for affluent grandparents who are heading towards an inheritance tax liability on their estate. Dyall says: ‘They could make a gift to help a grandchild pay off student debt or to fund a deposit on a first home.’

Trott says antiques, art or jewellery could be given away this way. She adds: ‘If you leave such items in your will, they will form part of your estate. But by gifting them in your lifetime, you will have the pleasure of someone else – for example a daughter or granddaughter – enjoying them.

‘Of course it will takes even years for the valuables to fall outside your estate for inheritance tax purposes, so you will need to factor that in when deciding to gift or not.’

Two final thoughts on gifts. First, it is key you keep a record of any gifts you make so that upon death the executors of your will have written proof. Also, that you are comfortable making them and do not compromise your own standard of living in the process. Dyall says: ‘One of the things we do as advisers is help people get a good idea of their income and costs in retirement. That then enables them to assess how much – if anything – they can give away.’

MORE TOP TIPS TO BEAT THE LEVY

USE

a pension to pass on wealth down the generations. New rules, stemming from the pension freedom regime introduced in 2015, allow you on death to pass your pension to a person of your choice without it forming part of your estate for inheritance tax purposes.

In most cases, if you die before age 75, any income from the pension is tax-free in the hands of the beneficiary.

If you die any older, the beneficiary will pay income tax on any pension income although they may choose instead to leave the fund untouched and pass it on themselves – allowing wealth to cascade down the generations.

These rules do not apply to all pensions – just those set up on a defined contribution or money purchase basis. Advice is vital as not all such plans adopted these rules.

MAKE

sure any life insurance policies are written in trust. This will mean any payout will not form part of your estate for inheritance tax. Insurers will arrange this – usually free of charge.

RULE

out gifting your home to children on the understanding you can continue to live there rent free. Sean McCann, a chartered financial planner at insurer NFU Mutual, says: ‘This issue comes up time after time but it does not work for inheritance tax. It is classed by the Revenue as a gift with reservation of benefit which means the home remains in your estate even if you live for more than seven years.’

A VARIETY

of trusts – for example discounted gift trusts – can be used in inheritance tax planning. Independent financial advice is essential.

INSURANCE,

held in trust, can be bought to pay an inheritance tax bill on death. But it can be expensive, especially for those who are elderly or in poor health.

SOME

investments such as enterprise investment schemes and many AIM shares may be exempt from inheritance tax – if they qualify for something called ‘business relief’ at the time of death. Some companies such as Octopus specialise in this area, running inheritance-tax friendly portfolios based on such arrangements. It is fraught with investment risk.

TAKE

expert advice. Connolly says: Effective tax planning can reduce a potential inheritance tax bill by thousands of pounds. But the rules are complicated and each person’s situation and requirements are different.

‘ There is also a balancing act between effective planning and making sure you do nothing that will impact adversely on your own standard of living. Independent financial advice is vital.’