Inheritance Tax Tips: Eight Ways to Protect Your Family’s Wealth

The nation’s most hated financial tax may be the inheritance tax, but it is a growing source of government revenue.

Families shelled out a record £6.1bn in inheritance rights last year, up from £729m in the previous 12 months.

Experts say rising home prices are partly to blame for rising property values.

At the same time, the threshold at which Inheritance Tax (IHT) kicks in has been frozen at £325,000 since 2009, and is expected to remain the same until 2025/2026.

Inheritance tax: Families shelled out a record £6.1bn in inheritance rights last year, up from £729m in the previous 12 months.

It means the most common households could be affected by the 40 percent tax, which has historically affected only the wealthiest people.

It is no wonder then that the issue of IHT has become a hot topic in the Conservative Party leadership race.

Last week, Liz Truss promised to review the tax should she become Prime Minister. The promise is a welcome relief for activists who say the system is too complicated.

In January 2020, an all-party parliamentary group produced a white paper calling for a reform of the IHT, calling it a “deeply unpopular tax”. But, no change has been made in the two and a half years since.

IHT is currently paid when the value of your estate exceeds £325,000. HMRC will treat any gift you make in the seven years before your death as part of your estate.

This is known as the ‘seven year rule’. If you die within this time frame, the tax will be applied on a sliding scale, starting at 40 percent within the first three years.

Property left to a spouse or civil partner is exempt. In these cases, your tax-free allowance is transferred to them, doubling it to £650,000.

In addition, if you leave a property to a direct descendant, such as a child or grandchild, you will also benefit from the £175,000 ‘primary residence zero rate band’.

In total, couples can give up to £1 million to their loved ones before inheritance tax is due.

These clumsy rules can make reading overwhelming. That’s why Money Mail asked tax experts to share eight tips to help protect your family’s wealth from the tax collector…

My 86 year old grandfather is making large cash donations to family members. Will we have to pay IHT?

This is Money’s resident tax expert, Heather Rogers, responds to a reader: find out how to ask her andour Ask here.

leave it right now

Giving away up to £3,000 a year tax free is part of your ‘annual exemption’. This can be given to one individual or divided among several. Or you can carry over the unused amount during a tax year.

You can also give £250 to as many people as you want each tax year, as long as you haven’t used another allocation to give cash to the same person.

regular income

The tax collector will not collect regular payments you make to loved ones from your excess income. This can be “relatively straightforward,” says Kieran Bowe, of The Law Society’s wills and equity committee.

Acceptable forms of income include your pension or money earned by renting a property. There is no limit to the amount you give, but it cannot affect your standard of living, so it should only be given after you have paid all of your other living expenses.

You must be able to show that these payments were made on a regular basis: monthly, yearly, or semi-annually.

They are covered by the ‘normal expenses outside of income’ exemption, so they are not subject to the seven-year rule.

What you need to know about IHT

Inheritance tax may affect only a small number of properties, but it can generate bills of hundreds of thousands of pounds for paying families.

In our inheritance guide and ten tips to avoid the IHT, we explain how the tax works and what you can do to alleviate its effects.

There are many legal ways to reduce the impact of the dreaded 40 per cent ‘inheritance tax’ if you want to transfer the maximum sum possible and are prepared to plan ahead.

Many, like spending more on yourself and making early gifts to family, can easily be done by the average person without the need for elaborate arrangements or paying for professional help.

However, if you know that your estate will face significant inheritance tax liability and you are concerned about that, it might be worth seeking professional help from a financial planner or adviser.

To determine if you need advice, planning or training, the following links can help you understand more:

> Financial advisor, planner or coach: what’s the difference?

> Financial advice: what to ask for and how much it can cost

> Find a financial advisor service

Wedding gifts

You can donate up to £5,000 towards your child’s big day without it being included in your annual allowance. For a grandchild or great-grandchild, you can give £2,500. The allowance is reduced to £1,000 for anyone else.

check pension

Any funds remaining within defined contribution pensions after your death are outside your estate and are exempt from IHT.

Although this is not the case if you have already purchased an annuity.

If you are a member of a defined benefit plan, there is no ‘fund’ to roll over, but there may be a provision made for a spouse or dependents.

Pensions are ‘invaluable’ in reducing IHT bills, says Anthony Kynaston of asset manager Ash Ridge, so be sure to review your policy regularly.

be charitable

Giving up to 10 percent of your estate to a charity or political party means the rate of inheritance tax owed on your remaining estate is reduced from 40 percent to 36 percent.

All charitable donations are tax free, so any donation from your estate will reduce your IHT bill.

invest wisely

If you choose to invest in companies listed on the Alternative Investment Market (AIM), which caters to smaller, higher-risk companies, you may not owe taxes if you die within two years of your death. investment, instead of seven.

This can be risky as stock markets are volatile and you could lose money. But John McCaffery of accounting firm Alexander & Co says: “You’d have to be more than 40 percent down to be worse off than getting a bill from IHT.”

Life insurance

A life insurance policy can ensure a fast, tax-free payment for your family. The money would normally be part of your estate, but not if you have it written ‘in trust’. This allows you to designate one or more beneficiaries who will be paid the full amount when you die. You can insure your life for the estimated value of your IHT bill.

However, the premiums can be high, especially as you get older. You may want to ask a financial advisor for help in making this type of arrangement.

set up a trust

A trust can allow you to transfer your wealth over time, says Natalie Jaques of investment management firm Sanlam. She can put £325,000 of her tax-free allowance into a trust, or £650,000 if she combines it with a spouse or civil partner.

Money placed in the trust will not be included in your taxable estate when you die, although it is subject to the seven-year rule. After seven years, you can transfer another £325,000, or £650,000 if you’re a couple.

find a consultant

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