Five tips to mitigate inheritance tax liability

According to recent HMRC tax data the number of UK estates liable for inheritance tax (IHT) is forecast to rise by 15 per cent to around 30,000 this year.  Every individual has a Nil Rate Band (NRB) of £325,000; for an estate in excess of the NRB there is a potential liability on their estate to pay 40% inheritance tax on the remainder.

One of the biggest concerns we hear from our clients is how can they ensure that their hard earned wealth can be passed fully to their beneficiaries without their estate being liable for Inheritance Tax.  By them recognising they  have an IHT liability and speaking to a regulated wealth planner they have already taken the first step in mitigating this tax.  The earlier a tailored individual solution is put in place the better.

There are many investment, insurance and trust based solutions that can provide very effective estate planning to reduce any potential IHT, below are some options that may be available;

Main Residence Nil Rate Band – From 6th April 2017, there will be an additional main residence nil-rate bank (RNRB) that can be used against the deceased interest in the value of their family home if being passed to direct descendants. Initially the RNRB will be £100,000 in 2017/18 rising annually to £175,000 by 2020/21 and then in line with the Consumer Price Index.  This will be tapered down for estate valued in excess of £2m.

Consider an insurance policy – A simple solution could be to purchase a whole of life assurance policy designed to provide funds to the beneficiaries of your estate in the event of your death to meet the cost of any Inheritance tax bill payable. 

Use your 5 IHT allowances

a. The annual allowance – Each person can give gifts totaling £3,000 per year, tax-free. You can also carry forward the previous year’s allowance if it is still available.

b. The small gift allowance – You can also gift away up to £250 to as many people as you like to reduce your estate. The only stipulation is that the recipient can’t be somebody you’ve used another exemption on.

c. Gifts on Marriage – there are also exemptions available on marriage/civil partnership.  A parent can gift up to £5,000; grandparent £2,500 or anyone else £1,000

d. Surplus income – it is also possible to make gifts that would be deemed to be taken from normal expenditure without any liability to IHT arising. 

e. Lifetime Gifts to Charity – all gifts to charity are exempt from Inheritance Tax.  Gifts to charity included in your Will can also reduce the rate of IHT payable from 40% to 36% on the remainder of your estate in excess of the nil rate band.  

Lifetime Gifts of Capital or an Asset – Gifting is a highly effective and common method for reducing the value of an estate for Inheritance Tax purposes. Substantial assets may be transferred directly to individuals or into a trust arrangement. Gifting is usually a strategy carried out by people who have little need for their capital reserves.  For a lifetime gift to be successful the donor needs to survive for at least 7 years after the gift was made for it to be completely removed from you estate.  The gift will be classed as a Potentially Exempt Transfer (PET) for the first 7 years.

Consider a portfolio that will qualify for Business Property Relief  – Business property relief (BPR) can be very effective way to remove assets from your estate but still have full access to the funds if needed in the future.  By investing into a BPR qualifying investment once the investment has been held for 2 years and as long as it is still held at death the assets will be excluded from your estate when assessing the Inheritance tax liability.   Investing in BPR qualifying investments carries higher risks as it involves investing in unquoted companies or AIM listed companies; however there are many packaged solutions available where any investment is asset backed which considerably reduces the risk compared to investing in a company directly.  

Before considering any strategy to mitigate any potential IHT liability due on your estate we always recommend you seek regulated financial advice, which our wealth planners can provide.

Read more about our wealth planning services here.