If there is a possibility of your estate exceeding £325,000, chances are your Will needs to be changed or your beneficiaries could lose out by as much as £140,000. There are many other methods of saving Inheritance Tax below, but that is probably the easiest. Reviews are free, and amendments are discounted for Peace of Mind Service Members.
If you have a pre-2018 tax planning Will, they are now the opposite of what is needed, and many very simple Will also create a needless IHT bill, so call us for a Review.
Inheritance Tax Changes Mean it is no longer a Tax just for the Wealthy.
The tax-free allowance has been frozen since 2009 and is to remain at £325,000 until 2028. An additional tax-free residence nil rate band is available as long as your Will does not cancel it – and many Wills will do just that, which is why we recommend everyone to join our Peace of Mind Service, to help them stay up to date and reduce the cost of the changes which inevitably happen over the years. Who would have thought that a first-rate IHT planning Will end up a few short years later creating a liability, due to tax changes? Failure to review can be expensive to those left behind!
With the sharp rise in property values meaning many more individuals are now liable for IHT, IHT receipts for April 2022 to August 2022 rose more than 10% over the same period of the previous tax year. By the time the nil rate band is reviewed in 2028, we estimate that the Inheritance Tax take will have more than doubled, mostly because people failed to take precautions such as having their Will reviewed and implementing a few simple tax planning tips.
Simple Planning to Reduce Inheritance Tax.
Remember, couples have these allowances each so can double up the giving – if they can afford it of course!
Don’t leave giving until the last minute or bank clearance could mean it doesn’t end up in the beneficiaries bank account until 6th April – and HMRC count it as next year’s gift,
DO keep a record of gifts, to whom and when, so your executors lives are made easier in arguing with HMRC.
Give one gift of up to £3000 a tax year (or two of £1500 or three of £1000 etc.) You can backdate once and give £6000
Give away as many sums of up to £250 as you wish as long as it is not to a recipient of the above gifts. No one can receive more than £250 in the tax year.
Ensure death benefits of life insurance and pensions do NOT get paid into your estate and become taxable. Sometimes a Pilot Trust is helpful.
Gifts out of normal income – you can give away surplus income as much as you like as long as it does not reduce your standard of living, and is on a regular basis.
Make larger gifts up to a total of £325,000 and no more and survive 7 years. Sometimes Trusts are used for this purpose to retain flexibility and/or an element of “income.”.
Leave money to Charities in your Will – if they get at least 10%, there is a small discount on the rest of the IHT bill.
Investments – various types of investment are IHT-free, but don’t confuse that with tax-free growth – tax-free growth then 40% IHT on death may be a very poor return indeed, but most IHT-exempt investments are classed as high risk – but not all. Business Relief plans offer benefits after 2 years. We are not Independent Financial Advisers, but can refer you to one if you don’t have one. This area is too complex to go into here, though there are things which save IHT but are not exotic!
Life Insurance to pay the Inheritance Tax – especially for couples, insuring against the burden of IHT is not necessarily as expensive as you might think. Again, a job for an IFA, not us!
Give away assets which have fallen in value – at least you save some or all of the Capital Gains Tax and hopefully the recovery will benefit the beneficiaries.
Home Income Plans – release capital or generate income now. There will be pressure to sell the home immediately it is no longer used, but they have their place.
For estates over £2m – Family Income Companies may be beneficial. Large property portfolios are examples. Running costs are a bit higher, but the tax saving potentional is significant.
How NOT to save Inheritance Tax.
The biggest trap is what are known as “gifts with reservation of benefit” – and here are some examples:
Giving your home to your children, but still living in it without paying a full commercial rent. This potentially creates additional tax, problems if children die
Home in Trust – this does not save Inheritance Tax on your death, but it can continue to save IHT for future generations by loaning out the value, then reclaiming it on subsequent deaths to reloan out again. Beneficiaries have the benefit of the value of your home, but as a loan, so under current rules it would not be taxable.
Holiday Homes – give them to your children, and continue to use them without paying a full market rent (taxable in the hands of the new owners of course.)
