- Deed of Variation
Any inherited money in the past two years that would increase the size of your taxable estate could be redirected to another person via a deed of variation of the deceased person’s Will.
- Spend your Money
As the rate of Inheritance Tax (IHT) is currently 40%, for every £1,000 of your estate left that could be liable to IHT the “taxman” will happily take £400.
So, remember it’s your money, so enjoy spending it knowing that at the same time you are significantly reducing any inheritance tax (IHT) arising from your estate.
- Gifts: Hand over your money
Married people and those in civil partnerships can give each other any sum they like free of tax, provided their partner lives in the UK.
Otherwise, you can gift £3,000 a year, plus make unlimited small gifts of £250, free from inheritance tax.
Wedding gifts are also exempt. The limits are up to £5,000 to your child, £2,500 to your grandchild or great-grandchild, and £1,000 to anyone else.
Less well-known is to contribute to the living costs of someone else – e.g. younger or older relatives – but only if you can prove it’s coming out of spare income.
Beyond this, you can hand unlimited sums to other people, but as potentially exempt transfers they will fall under the so-called seven-year rule.
- Life insurance: Put the policy in trust
To stop a life policy payment getting rolled into your estate, and the taxman potentially grabbing 40 per cent of anything over your inheritance tax threshold, you need to put it into trust.
You need to be in good health, to avoid HMRC thinking you are just trying to dodge inheritance tax.
Putting a life policy into trust can be done with the help of a financial adviser, and you might well need legal input too.
- Pension pots: Pass your retirement savings on
How much your heirs benefit depends on what type of pension you have and your age when you die.
Beneficiaries now either pay no tax if the pension holder dies before age 75, or if they are 75 or over, normal income tax rates will apply – the money received being added to their earnings to calculate this.
Also, husbands and wives whose partners die before reaching 75 can now get annuity income from their spouse’s pension tax-free.
However, these pension changes have not affected people in final salary pensions.
- Supporting a cause: Give to charities and political parties
You can gift or bequeath money to charities and political parties and it will be excluded from your estate when inheritance tax is calculated.
There is also a way to reduce your heirs’ inheritance tax rate from 40 per cent to 36 per cent of your taxable estate by giving to charity – although not to a political party.
You can do this by bequeathing at least 10 per cent of your net estate – the part liable for inheritance tax – to charity in your will.
However, the value of the money gifted to charity plus the 36% tax rate on the net estate will exceed 40% tax rate applying to the net estate with no gift to charity.
- Home ownership: Switch from being ‘joint tenants’ to ‘tenants in common’
Most people who own property together do so as joint tenants. That means they ‘jointly and severally’ own 100 per cent of the home, and when one dies the other becomes the 100 per cent owner.
This overrides anything you may say in your will, so you cannot leave your share of the property to anyone else.
Spouses don’t pay inheritance tax so there is no liability at that stage if they get the home after the death of a first partner – although if the co-owner is anyone else it could be due.
But if a couple opts to make their ownership ‘tenants in common’, they have the option of splitting it differently – say, 40/60 – and leaving their share to someone other than their partner.
You may not want your partner to inherit your share of the property, because this could increase the value of their estate so that when they die their heirs have to pay inheritance tax.
Before the second death, some value is already out of the estate. So if it was 50/50, and 50 per cent went to a son, it would now be out of inheritance tax.
So, if you and your partner have children, you could leave your share of the property to your children so that when your partner dies only his/her share of the house is counted as part of his/her estate.
- Owning a business: Pass on the family firm
To prevent inheritance tax bills forcing sales of small firms, the Government offers protections when trading businesses are left to family members.
To qualify for Business Relief, you need to have owned a firm or shares in it for at least two years by the time you die.
Privately owned firms and some listed on AIM, the small company arm of the London Stock Exchange, also qualify for Business Relief.
But there are exceptions, such as those in the property or investment sector. There are also separate rules for businesses involving farming and forestry – see below.
- Boosting enterprise: Invest in small companies
To encourage investment in smaller business ventures, the Government also gives people protection from inheritance tax if they hold shares in firms with Business Relief status for at least two years.
However, investors interested in this area should beware that firms qualifying for this are considered to be at the riskiest end of the spectrum. So, you need to take expert advice and/or research carefully and spread your investments so they are not too concentrated in this area.
Some specialist investment firms offer schemes helping people buy shares in the right companies to cut their inheritance bill.
This makes Business Relief a suitable inheritance-planning tool for wealthy people, who are either experienced investors themselves or can afford high-end financial advice, not the modestly well-off who can’t afford to risk a lot of their investment pot in this sector.
But with Business Relief products people will be investing in small companies, so it’s important to consider how suitable that is and ‘look more holistically’ at their whole situation.
But don’t be blinded by the tax savings and putting money in products you would otherwise steer clear of.
- Farming and forestry: Arcane corner of tax law
If you are not in this type of business, these are the least practical and most complex to get your head around and you will need professional advice on inheritance planning.
You are allowed to pass on property free of inheritance tax if it qualifies for agricultural relief, which is described by the Government as ‘land or pasture that is used to grow crops or to rear animals intensively’.
However, whilst farmhouses are usually included, farm machinery, livestock and harvested crops are not.
And to qualify, the property must have been held and occupied for at least two years by the owner or their spouse, or seven years by someone else, and be part of a working farm in the UK or European Economic Area.
Meanwhile, people who own woodland can get full Business Relief from inheritance tax if it has been owned for two years and is commercially managed.
They can also qualify for woodland relief, which defers inheritance tax – perhaps indefinitely – on the value of growing timber until it is felled and sold.
In conclusion, there are many ways of planning your estate to minimise inheritance tax. You should consider taking expert professional advice before deciding which are best for you.