Dental and Medical gives you a few simple ways you can avoid a hefty inheritance tax bill for your family.
It is natural to want to pass on as much of your wealth as possible to your family. This is why inheritance tax (IHT) is often seen as a ‘problem tax’, as there reaches a point where the harder you work, the more assets you accumulate and therefore the harder the tax hit to your estate after your death.
There are a few familiar methods to reduce your IHT bill, which have been used for years and still work, although they are restricted. In this article we remind you what these are and the rules that apply.
Also, did you know about a new allowance has been introduced from April 2017 that offers some additional tax relief on the value of your main residence? We cover this too so you can work out your combined tax-free allowances.
Another IHT reducing method that is not so common, and often overlooked as a viable option, is using business property relief. It isn’t suitable for everyone as it ventures into more complex tax planning, however if you are interested to reduce your IHT bill then it is worth considering all your options.
Your nil-rate band
Each individual is granted an amount of £325,000 to which IHT does not apply, called the nil-rate allowance. This changes, although at present it has been the same since 2009.
The value of your estate above the nil-rate threshold is taxed at the (current) rate of 40%.
The assets that make up your estate can include cash, property, business shares, ownership of a business and personal possessions; it is the sum of all your wealth and assets combined.
If you are married, or in a civil partnership, then the nil-rate band can be inherited by the surviving partner, resulting in an IHT tax-free allowance of £650,000 (current rate).
Your new family home allowance
Since April 2017, each individual is entitled to an additional tax-free allowance relating to his or her main residence, also referred to as the ‘family home allowance’.
This initiative has been introduced to recognise the exponential growth in UK property prices and how this affects IHT.
Starting at an additional £100,000, this will be phased-in to reach a total tax-free allowance of £175,000 by 2020.
Passing down your main residence to a direct descendent before your die, will also free up further tax credits relating to IHT.
Familiar ways to reduce your IHT
A common way to reduce IHT is to give away your assets during your lifetime.
This can be in the form of cash gifts or passing down of assets such as property.
However, for the value to be exempt from your estate, you need to survive for at least seven years following the date of gifting.
The same seven-year rule applies to assets held in trust.
Business property relief can reduce IHT
Gifting assets or holding assets in trusts both require you to part with your money and the concern is often ‘what happens if I need the money in later life?’
An often-overlooked way to reduce your IHT without the seven-year rule, and allowing you to retain control and flexibility over your money, is to use business property relief.
This method involves purchasing shares in trading businesses that qualify for business property relief (BPR).
Shares in these businesses can be left to beneficiaries without an IHT implication, as long as you have owned the shares for more than two years at the time of death.
It isn’t used as frequently as other methods, as there is an element of risk involved, as with any investment.
However, with careful consideration and the help of a financial adviser, it can be an option to reduce, or eliminate, your IHT, whilst still being able to make decisions about your finances.
Speak to a specialist financial adviser to discuss ways to reduce your IHT that are relevant to your personal circumstances and your attitude to risk.
This article does not constitute advice. Professional advice should be taken prior to acting on any part of it.