Avoiding Inheritance Tax - for the savvy baby boomer

Inheritance Tax Document

Avoiding Inheritance tax was something only the very rich had to worry about, but in recent years mostly due to the soaring property market, it has  affected many homeowners particularly in property hot spots like the South East.

If you've owned your own home for a number of years you will have seen a vast increase in it's value.  A modest 3-4 bedroomed detached house will now easily be valued at around £325,000 which  is the current tax threshold for inheritance tax  with the threshold for couples set at £650,000.

This meant that many ordinary families were likely to inadvertently burden their heirs with a large tax bill.

However in the emergency budget in July 2015 The Chancellor announced his intention to increase the tax threshold from £325,000 per person to £500,000 by adding a new family home allowance worth £175,000. I'm sure a sigh of relief went up in many households. 

When the new thresholds come into effect it means that married couples and civil partners will be able to pass on assets worth up to £lm, including a family home, without paying any inheritance tax at all.  This is a saving at the maximum level, in inheritance tax of £140,000.

The move will be introduced gradually with the tax free threshold increasing by £100,000 in 2017-2018, and then rising by £25,000 in each subsequent year to reach £500,000 by 2020.

Inheritance tax will continue on the value of an estate above the tax free threshold so anyone who owns a property or other assets over £500,000 or jointly over £1 million will still be charged inheritance tax at 40% over for every £1 over £1 million.

All of this is very encouraging for babyboomer homeowners but people should still be getting specialist advice to ensure that their estate and assets are protected as best they can be in light of the impending changes over the next 5 years.

Avoiding inheritance tax is still important if the value of your estate, including your home and certain gifts made in the previous seven years, exceed the threshold, tax will be due on the balance at 40%.

For further information go to www.gov.uk/inheritance-tax

If you think that you will be affected it is vital that you seek sound financial advice to find ways of avoiding Inheritance Tax.

We're not talking about anything illegal here, but who wants to pay tax when it can be avoided!

There are a number of ways that your estate can be safeguarded by utilising allowances and trusts in clever ways.

With careful planning your liability can be greatly reduced and your beneficiaries protected.

Careful planning will help you in avoiding inheritance tax!

  • Ensure you have a suitable Will in place.
  • Making use of all the available allowances and exemptions.
  • Gifting assets and surviving for seven years.
  • Using trusts.
  • Using Tax efficient investments.

If you are unsure whether you would be liable for inheritance tax use this inheritance tax calculator to assess the potential value of your estate.

If due, Inheritance Tax must be paid before probate - i.e. before anything left in your Will can be distributed. That's assuming you've made a Will. 

Have you made a Will?

Last Will and Testament

If you make a will leaving your entire estate to your spouse then you will normally be avoiding Inheritance Tax.

Otherwise, if you don't make a Will, you might incur Inheritance Tax as your Estate might not all go to your spouse!

Read what the consequences are if you don't make a Will!

What's a Discretionary Trust Will?

The Inheritance Tax threshold for married couples and civil partners is, following the Chancellor's announcement of October 9th 2007, double the single person threshold. It may be worth considering a 2 Year Discretionary Trust Will.

Note that this Inheritance Tax saving is only to be had on the first death of you or your spouse.

A Discretionary Trust Will can be a way of avoiding Inheritance Tax as it basically ‘ring-fences’ some or all of the assets of the first spouse/partner to die in such a way that they can either:-

  • Be used to use up the Inheritance Tax allowance of the first spouse/partner to die and/or
  • be used to ensure that the assets of the first spouse/partner do not attract Inheritance Tax twice – i.e. upon first death and then upon second death

Gifting can reduce inheritance tax

You can make gifts to certain people and organizations avoiding Inheritance Tax. These gifts are exempt whether you make them during your life or as part of your will.

You can make exempt gifts to:

  • your husband, wife or civil partner, as long as they have a permanent home in the UK.
  • A 'qualifying' charity established in the EU or another specified country.
  • Some National institutions such as Museums, Universities and the National Trust.
  • Any UK political party that has at least two members elected to the House of Commons or has one elected member, but the party received at least 150,000 votes

Gifts that you give to your unmarried partner, or a partner that you're not in a registered civil partnership with, are not exempt.

10% IHT reduction - Gifting to Charities

If you die after 5th April 2012 and you are due to pay Inheritance Tax and you leave more than 10% of your estate to charity then the Government will reduce your Inheritance Tax bill by 10%.

For example:

  • Estate £1,000,000. inheritance tax bill normally 40% of (£1,000,000 minus £325,000) = £270,000.

  • Leaving £100,000 (10%) to charity will mean inherintance tax bill is 36% of (£1,000,000 minus £100,000 minus £325,000) = £207,000.

Make sure you use your annual exemptions

If you use your annual exemptions each year you are avoiding Inheritance Tax on some of your estate.

You can give away gifts worth up to £3,000 in total in each tax year and these gifts will be exempt of tax when you die.

You can carry forward any unused part of the £3,000 exemption to the following year, but if you don't use it in that year, the carried-over exemption expires.

Wedding or civil partnership ceremony gifts are exempt from Inheritance Tax, subject to certain limits:

  • Parents can each give cash or gifts worth £5,000.
  • Grandparents and great grandparents can each give cash or gifts worth £2,500.
  • Anyone else can give cash or gifts worth £1,000.

You have to make the gift - or promise to make it - on or shortly before the date of the wedding or civil partnership ceremony.

If the ceremony is called off and you still make the gift - or if you make the gift after the ceremony without having promised it first - this exemption won't apply.

You can make small gifts up to the value of £250 to as many individuals as you like in any one tax year. However, you can't give more than £250 and claim that the first £250 is a small gift.

If you give an amount greater than £250 the exemption is lost altogether.

You also can't use your small gifts allowance together with any other exemption when giving to the same person. 

The 7 yr Rule

Any gifts you make to individuals will help towards avoiding Inheritance Tax as they will be exempt as long as you live for seven years after making the gift.

These sorts of gifts are known as 'Potentially Exempt Transfers' (PETs).

With good financial advice AND planning ahead, there are a number of ways to reduce your inheritance tax liability, such as:-

Use Trusts to protect your assets

Trusts can be used for protecting both assets and interests thus avoiding Inheritance Tax on your estate.

Some of the most common family situations where trusts are used (often in conjunction with a Will) are:

  • To provide for a husband or wife after death while protecting the interests of any children.
  • To protect the inheritance of young children until they are old enough to take responsibility for their own efforts
  • To provide for vulnerable relatives who are unlikely to be able to look after their own affairs.
  • To help succession planning in family businesses.

You can even have your life assurance policies written into a trust.

A Solicitor will be able to advise you on which trust is best for your own personal circumstances.

The alternative investment market

You can save on Inheritance Tax by investing in the Alternative Investment Market ('The AIM'). An AIM Portfolio can be completely exempt from Inheritance Tax if held for two years or more.  Seek advice from a Financial Advisor about AIM's.

For more articles on Financial Matters go to the links below:-

Retirement Income Planning

 Index of all other Financial Articles

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