Avoiding Inheritance Taxation

Please Note

Since this item was written, some of the information may no longer apply due to legislative or tax changes. To read more up-to-date information on this topic, please select from one of the related items.

The Probe - September 2006

In the 2005/2006 tax year HM Revenue & Customs collected £3.3bn in inheritance tax (IHT) with the average estate facing a bill of £88,000. Although the IHT threshold was raised to £285,000 in the 2006/2007 tax year and will increase gradually up to £325,000 by 2009/2010 with booming house prices many people will be facing a tax of 40% on assets over this threshold.

The following gives some simple examples of ways to reduce your IHT liability.

Gifts

Exempt Transfers

Transfers between husbands and wives are free of inheritance tax and amounts up to £3,000 may be gifted per tax year to any person, and the previous years allowance may also be gifted if the allowance was not used. Extra gift allowances apply on marriage - £5,000 from each parent, £2,500 from each grandparent and £1,000 from any other person. You can also make unlimited ad hoc gifts of £250 to any number of people!

Potentially Exempt Transfers

These allow you to give away money and escape IHT if you survive for at least seven years. However you can invest in assets which will be 100% relievable for IHT if eligible for business property or agricultural property reliefs (two year PETS!). For example an investment into qualifying shares in the AIM market held for two years or more at the time of death are exempt from IHT. But if you don’t want to give your money away whilst you’re still alive the next few ideas might be more appropriate.

Will

You can save over £100,000 by making a will so it creates a nil rate band trust or a Discretionary Will Trust. This really works for couples where the surviving spouse doesn’t necessarily need access to the £285,000 and is prepared for it to go into trust for the next generation.

Property

Some lawyers advise severing the ‘joint tenancy’ on your main residence and owning the house as ‘tenants in common’ so that on first death half the value of the house can be passed to the children (up to the value of the nil rate band) IHT free.

Life Insurance

This is perhaps the simplest way of paying for the tax as a life insurance contract is set up to pay the liability to IHT on the death of the surviving spouse. Most importantly make sure this is set up in trust or the payout will simply fall back into the estate and be taxed itself!