MONEY TALKS Seven ways to reduce your inheritance tax

THE shadow of Inheritance Tax (IHT) never seems to go away, as much as we’d all like it to. But there are a few things you can do right now to limit how much will go to the state when the time comes.

Here are seven ways of reducing your bill:

1. One of a person’s biggest assets tends to be their pension. Very often that pension, on their death, will automatically transfer to the spouse, often as a tax free lump sum. But it’s then added to his or her estate and very often that, plus other investments and the family home might mean there is inheritance tax to pay.

Leaving your pension death benefits (pension lump sum and death in service) to an asset preservation trust can potentially protect those assets from a subsequent IHT bill.

2. Make use of the standard exemptions. For example: you can give away £3,000 each year in gifts, including £3,000 from the previous year if you haven’t done so using carry forward. These means a husband and wife could give £12,000 in the current year and they can make this gift outright now.

It’s immediately exempt from

IHT and can be paid directly to the beneficiaries or into a trust and invested for a future need, such as education costs for a grandchild or something similar.

There are a range of other smaller personal allowances that you can use if you’ve got the funds available to do it that are immediately exempt.

3. One allowance that people often overlook is gifts out of income, which as long as you maintain a regular record of them, are immediately exempt.

Say for example you only use 60% of your net income to support your lifestyle. There’s nothing stopping you giving the remaining 40% either directly to children/grandchildren or whoever, or putting it into trust for others. Providing these gifts form a regular pattern and that you document them over time then they are immediately exempt from IHT and there is no limit to the sum of money you can give.

What you can’t do is use capital to makes the gifts using this exemption

- it’s got to be surplus cash from your income.

4. Most people have some form of life insurance if they’re not retired and, from my experience most life insurance policies are not set up in trust.

Consequently, if someone passes away the value of this is treated as though it’s part of the estate for IHT purposes.

If that money is going to go to the spouse that’s fine but it aggravates his/ her IHT situation whereas if the life insurance is paid to a trust then the money doesn’t form part of the estate. The trustees, who can include their spouse, can then distribute the money in line with your wishes.

This is especially relevant with more and more people living together who are unmarried and not in a civil partnership. If one person in the relationship dies and passes their assets to their partner there will often be

IHT to pay. So taking life insurance out of the estate by using a trust can help reduce this liability.

5. You can also reduce your IHT liability by making a gift to charity and if you’re single this might appeal as these gifts are exempt from inheritance tax.

6. A lot of people are unaware that you can gift as much as you want to someone right now which, if you live for seven years after the gift, will be completely free from tax.

Even if you die sooner, you could substantially reduce your tax bill because the gift is subject to what’s known as ‘The 7 Year Rule’. This means that if there’s inheritance tax to pay on your estate, the charge on the gift is levied on a sliding scale over seven years.

7. I very regularly bump into people who are high earners and are affected by the annual allowance restrictions for pensions.

They are often looking for some alternative investments that they might get some tax relief on. There are certain types of investments which carry higher risk but also attract 30% income tax relief and which after two years, would be exempt from inheritance tax, such as Enterprise Investment Schemes (EIS).