28 October 2009

6 Simple Ways to Reduce Inheritance Tax

Of course, you may not expect to have an Inheritance Tax (IHT) bill at all. But if you think you might have, and if you don’t want to rely on the Conservatives (a) being elected, (b) doing what they say they will (increasing the IHT allowance), and (c) doing it before the end of your life(!), then here are some ways to reduce a future liability.

The tax is a hefty 40% so is worth avoiding if possible (yes, tax avoidance is legal – it’s tax evasion which isn’t!). And the big problem on this (arguably immoral) tax is that it applies to gifts made up to 7 years (or even 14 years in some cases) before you die. So if you receive a gift from someone who subsequently died, the tax man may may come to you and ask you to pay 40% tax on that gift – even if you’ve now spent it. Not good! But getting off my soapbox …

  1. Nil Rate Band – this is currently (in 2009/10) £325,000 per person. Up to this level of assets you have no IHT worries. What’s more, if you are widowed, you will probably be able to use your late spouse’s Nil Rate Band as well.
  2. Annual allowance – You can give away up to £3,000 per year (reducing your estate’s value) without paying IHT.
  3. Small gift allowance – In addition, you can give as many small gifts up to £250 as you like, provided they are to different people, and they don’t overlap with the Annual Allowance.
  4. Gifts on marriage – allowances if you are related in certain ways to someone getting married.
  5. Regular gifts out of income – If it can be shown that you have been making a regular gift which is (a) part of your normal expenditure (is “habitual”), (b) is made out of your income (not out of capital), (c) allows you to maintain your normal standard of living, then it would not be liable to IHT.
  6. Gifts to charities, or in “the national interest” – not liable … simple; as is the case if you die on active service (yes, IHT applies to the young as well as the old).
Those are the simple things you can do to reduce an IHT liability. Beyond that it starts to get a little more complicated, with various sorts of trusts, for example, and/or loans which create a debt on your estate, including Equity Release plans. They are certainly worth looking at if you need to, but that’s for another day.

Reminder: This is not personal advice. It is my personal opinion and not that of any organisation I am connected with. So there.

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