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Looking at ways to minimise your Inheritance Tax
11:40am Friday 1st March 2013 in Lifestyle
Question: I’ve recently heard that an estimated million more families are set to be pulled into the inheritance tax net, following government plans to freeze the tax-free threshold for six years. Is there a way to reduce my Inheritance Tax liabilities?
Answer: Inheritance Tax, shortened to IHT - which arguably should stand for Incredibly Horrible Tax because whilst you’re alive the tax man takes VAT, Stamp Duty, Income Tax, Capital Gains Tax, Fuel duty, Council Tax, amongst others, and then if you have over £325,000 when you die, 40 per cent more – is something that no-one wants to pay more of than they have to as it’s a very human instinct to want to pass as much of your estate on to loved ones as possible.
So, what to do to ensure IHT is not minimised? There are a number of ways. Firstly, get married. If you pass all of your wealth to your husband or wife, for example, there is no IHT. It will also allow you to have two nil rate bands to set against your total wealth, i.e. £650,000. This means that a couple with assets of £650,000 would see their relatives not paying any IHT, whereas an individual with this size of estate would see their heirs paying 40 per cent on the amount above £325,000.
You should also make a will - even those with small estates should do this, as if you don’t you could find that the State gets all of your money anyway, especially if you have no spouse or children.
Another way is to spend it. If you can spend your estate before you die, then you will fall below the amount where IHT kicks in.
It’s wise to insure the liability, meaning let an insurance company pay your tax bill. Almost everyone who is of average health should consider this, as the cost of cover is very low, since you are usually insuring a risk of the second person dying of the two spouses. This costs less than most people think, so get a quote and ensure you write the policy in trust otherwise it will only make matters worse, as a policy in trust does not form part of your estate on death.
Additionally, make sure your pension can pay out in to a special trust on your death, and not necessarily straight to your spouse, as this will allow them to keep the untaxed sum out of their estate in the event that you die early.
We also recommend using your allowance too. You can give away as much as you like each year from your income so long as this is affordable and does not cause you hardship or doesn’t spend your capital.
Finally a great way to reduce the IHT burden is to gift money so that those who will ultimately benefit when you are dead get the benefit now. This is because you need to survive your gifts for 7 years - or else they may not work as effectively, therefore gifting sooner rather than later is preferable.
As you can see, most people shouldn’t have to pay IHT. A thorough review with a good adviser should allow you to identify the potential liability, and then using some of the options above, you can put a plan in place to minimise this tax.
- Mitch Hopkinson is a managing partner of deVere United Kingdom, part of the deVere Group, the world’s largest independent financial advisory firm.