Inheritance tax

This month Mitch Hopkinson, a winner of the Financial Adviser, a Financial Times publication, ‘UK Independent Financial Adviser of the Year’ award, discusses inheritance tax. This form of taxation is often dubbed the “cruellest of all the taxes” as it is, in effect, a form of double taxation and it impedes leaving your full estate to loved ones.

Do you ever spend thousands of pounds at Christmas buying a present for someone you don't even know? I bet some of you do. And you don’t even know it.

It's Christmas – who should get the biggest Christmas present? Your children or the Chancellor?

Your children should of course, and with a little extra thought and planning, they can. However, if you don’t plan ahead, someone you are not related to, the taxman, could get a Christmas present that will cost you more than you could ever imagine.

It’s that time of year again when we scratch our heads about what to buy our loved ones. And it is a shame that we do not put more of that kind of thought in to how much tax we pay. After all, the amount of tax we pay is really up to us, isn’t it?

Well, for inheritance tax (IHT), this is definitely the case. It is, arguably, the worst of all taxes… one that hits you when you are dead. Anyone whose estate is less than £325,000 need not worry about this, as the 40 per cent tax only applies when you leave more than this figure (it doubles for couples because each person gets a nil rate band of £325,000).

For those with larger estates, and that is an increasing amount of people, this is a tax that you can reduce or simply not have to pay in the first place. This is where this time of year comes in, because one of the most effective ways of reducing the tax is to give your money away! That's the Christmas spirit at its best, isn't it? This year house prices are set to rise - a gift from house price inflation and the IHT nil rate band is set to stay fixed at the current rate for a few more years. This means that many more people will start to fall in to the inheritance tax band for the first time, and many more will effectively have a bigger tax liability to face when they die.

With this in mind, those people who can afford it, should consider giving their loved ones some of their money now when they are alive and can see the benefit this gives their loved ones. Why wait until you are dead to do something that you can easily arrange now when you are alive and kicking? I often encourage clients to do this at this time of year, as it seems to chime with the festive season and makes financial sense on many levels.

There are rules for gifting, but they’re quite straight forward in practice. You are allowed to give up to £3,000 in total as a large gift (from each person who is making the gift – the Donor) – so couples can give £6,000. This is quite a lot and would make a very nice Christmas present – remember that giving works both ways, as you reduce your taxable estate, and have the pleasure of seeing your loved one's benefit from your generosity. You can also reflect on the knowledge that you have potentially saved 40 per cent in tax on that gift too. Your loved ones will be able to use the funds to help make themselves better off, paying down high interest debt, for example, is a great way to save them money.

You can also make as many small gifts of £250 to whomever you like. In addition, if you have more money each month than you need to live on, why don’t you use this 'spare money' to start gifting on a regular basis to your grandchildren? These are exempt from inheritance tax – just keep a good record of what you have done for future reference – and make sure that the gifts don’t adversely impact on your day to day living. The most tax efficient use of this money would be to save in to a pension for them and effectively get a 20 per cent boost on the money – which is on top of your potential 40 per cent IHT saving. This is because each pound you save gets basic rate tax added back in by the government as an incentive to save for retirement. This really is a way that you can leave a legacy far in to the future for the next generation to enjoy.

Merry Christmas!

Mitch Hopkinson is a managing partner of deVere United Kingdom, part of the deVere Group, one of the world’s largest independent advisers of specialist global financial solutions to international, local mass affluent, and high-net-worth clients, through a network of 70 offices across the world and more than 1,000 staff. It has in excess of 70,000 clients and $9bn under advisement.

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