Break free from the inheritance tax trap
WHILE Chancellor Philip Hammond ordered a review of the inheritance tax rules in January this year, for now everybody has a nil-rate band of £325,000.
This means the first £325,000 of a person’s estate will escape inheritance tax. The rest will be liable to tax at 40 per cent.
Spouses and civil partners can combine their nil-rate band to a tax-free £650,000. They can also pass on their estate to each other tax free.
In addition, there is a main residence allowance, which stands at £125,000 per person.
This means a single person owning a home can leave taxfree wealth of £450,000 while a married couple or civil partners can leave up to £900,000. Above these figures, Revenue & Customs will levy tax at 40 per cent on your estate when you die.
The main residence allowance is being increased by £25,000 a year until it reaches £175,000 in the tax year starting April 6, 2020.
With more people being caught by inheritance tax because of rising property prices, there are numerous ways you can mitigate the inheritance tax trap.
DRAW UP A WILL. This is the most basic, but often most neglected, form of estate planning (see pages 4 and 5).
GIVE AWAY £3,000 A YEAR. Each tax year you can make a gift of up to £3,000 to anyone you like or split it between a number of people. Any unused exemption from the previous tax year can also be utilised, so a couple could in theory gift up to £12,000 in this tax year.
SMALL ANNUAL GIFTS of £250 can be made to as many people as you wish free of inheritance tax – as long as they are to different people. You can also gift money to children for certain key life events such as a marriage. For example, if children are getting married this year, then parents can gift £5,000 to each child as a wedding gift, while grandparents can gift £2,500.
REGULAR GIFTS can be made free from inheritance tax, provided they do not impact on
SMILE: Parents can give £5,000 as a tax-free wedding gift your standard of living. Larger gifts can also be made, with these escaping inheritance tax provided you survive seven years afterwards.
PENSION FUNDS are free from inheritance tax and can be passed on tax efficiently.
TRUSTS can be effective in reducing the value of an estate – and any potential inheritance tax charge. But as with large gifts, they only fall outside your estate for inheritance tax purposes if you live for at least seven years after establishing the trust.
INSURANCE, written in trust, can reduce the impact of inheritance tax on an estate.
This works by paying a sum on death sufficient to meet any inheritance tax due.
Emma Thomson is a director at protection specialist LifeSearch. She says: ‘Whole of life insurance lasts until you pass away. The amount of cover is typically the same amount as the estimated tax bill. It means
children have sufficient funds to pay the tax bill without the need to sell the family home or any other assets.’
INHERITANCE TAX can also be mitigated by leaving sums in your estate to registered charities or political parties.
FINALLY, while Isa savings can form part of a person’s taxable estate, an Isa invested in AIM-listed shares can be passed to loved ones free of inheritance tax.
Alex Davies of Wealth Club, a specialist high net worth advice service, says: ‘If you hold qualifying AIM shares in your Isa on death – and have done so for at least two years – they can be passed on free of inheritance tax.’
Such smaller companies are high risk investments. Sanjay Arora is helping his mother, Kamla Arora, to take steps to mitigate inheritance tax, including investing in AIM Isas. He lives with his 80-year-old mother in Langley, Berkshire, along with wife, Suman, and son, Krishav, aged seven.
Sanjay, a property developer and accountant, says: ‘Mum has worried about inheritance tax as her health has deteriorated.’
As a result, she decided to shift some money from a cash Isa into an AIM Isa, which can be passed to heirs free of inheritance tax. Taking such a step should only be made after professional financial advice. Kamla sought advice from Wealth Club.