Alleviating your inheritance tax bill shouldn’t be a worry

Posted on April 15, 2019

Inheritance tax (IHT) can be an incredibly punitive tax on your estate. However, by making the right choices, you can vastly reduce the amount of your estate liable for IHT.

While other tax free allowances, such as the ISA allowance, have risen in recent years, the IHT threshold has remained stagnant. Since April 2009, the individual allowance has remained at £325,000. Anything above this is taxed at 40%. Research from Hargreaves Lansdown suggests that had the threshold kept pace with inflation since 2009, it would now stand at £436,566. Here are some ways you can mitigate the amount of your estate the taxman takes when you die.

Spend

This is the simplest way to reduce the size of your estate. If you spend money on yourself, it’s not considered part of your estate for IHT purposes when you die. However, things you gift to members of your family or friends can become liable for IHT.

Gifts

As we previously mentioned, in some cases gifts can be liable to IHT. Gifts made to an individual become exempt from IHT only if they are made seven years before you die.

If you die within seven years of making the gift, the value of any gift that lies outside of your £325,000 tax free allowance is taxed according to a sliding scale. Gifts made less than three years before you die are taxed at 40%. This reduces to 8% within six to seven years after your death.

The annual gifting allowance is £3,000, while you can also make small gifts of £250 per person. Gifts between spouses and civil partners are always exempt from inheritance tax, providing that they were born in the UK. If they weren’t, there may be limits.

Trusts are sometimes used to control how the gift is spent by the recipient. This means you can choose what the money goes towards, as well as when they can access it. Other common ways of gifting are contributing towards a Junior ISA, helping with education fees or contributing towards a deposit on a property.

Investing

Investing in certain types of stocks can be a good way of reducing your liability.

AIM stocks – invested in smaller companies – count as part of your estate, but are taxed at only 0% after a period of time. These assets become exempt from IHT after they have been held for two years rather than seven. If you’re interested in investing in AIM stocks it’s worth doing your research to make sure they’re the right financial decision for you.

If you’d like to know how you can begin to reduce your IHT liability, it’s worth seeking independent financial advice. This will enable you to tailor an estate plan right for you.

Please note that the information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by Pearson Solicitors and Financial Advisers Ltd or any of its members or employees. Professional legal advice should be obtained before taking, or refraining from taking, any action as a result of this article.

This blog was posted some time ago and its contents may now be out of date. For the latest legal position relating to these issues, get in touch with the author - or make an enquiry now.