10 steps to avoid being hit with 40% Inheritance Tax in 2018
According to HMRC, Inheritance Tax receipts reached £5.3 billion in the year to November 2017, up by almost 13% for the whole of 2016! That’s’ a huge amount of money and it is increasing dramatically, year on year.
Although there is action that can be taken many families are failing to take advantage of the tax breaks available when passing wealth from generation to generation. This is seeing many families having to pay the full Inheritance Tax rate of 40%.
This often causes significant problems – especially as many people are asset rich but do have the liquid cash available to pay the tax bill.
So here are the top 10 steps to avoid being hit with 40% Inheritance Tax in 2018
Take advantage of lifetime gifts and Potentially Exempt Transfers
You could consider gifting money or assets during your lifetime to reduce or potentially exempt them from Inheritance Tax. The liability on such gifts reduces by 20% each year if you survive by more than three years after making the gift, down to zero after seven years.
Make gifts to friends and family out of excess income
Individuals are allowed to make the following gifts, exempt from Inheritance Tax, each year:
- £3,000 (one year’s unused allowance can be carried forward to the next, accruing a total allowance of £6,000)
- Wedding gifts worth up to £5,000 for a child; £2,500 for a grandchild; or up to £1,000 for anyone else, can also be made free of IHT
- Multiple small gifts of up to £250 per person can be made each year, as long as they have not already benefitted from other gifts made.
- Gifts made out of excess income as part of a regular pattern of giving are exempt – with no limit to the amount which can be gifted.
Check your will is up-to-date
Make sure you have written a Will and that is correctly signed and witnessed. If you already have a Will review it periodically to ensure that your current wishes are reflected.
Check to see if the value of your estate is likely to exceed the nil rate band
Knowing the approximate value of your estate means you can take action in advance to reduce the amount of Inheritance Tax your beneficiaries may have to pay.
Estates worth £325,000 can be passed on free of Inheritance Tax. For married couples and civil partners, this nil-rate band can now be transferred to a surviving spouse – effectively doubling the nil-rate band to £650,000.
Additionally, there is the residential nil-rate band which allows individuals wish to pass on a property to direct descendants, worth an extra £100,000 free of Inheritance Tax in 2017/18, rising to £175,000 by 2020/21.
Consider setting up a trust
If your estate is likely to exceed the nil-rate band you could consider setting up a trust to shelter assets from Inheritance Tax. This means your assets held in a Trust for the benefit of your beneficiaries, will no longer form part of your estate for Inheritance Tax purposes. This is subject to the gift being made and you surviving 7 years.
You sell or give away some assets free of Capital Gains Tax
Assets worth less than £6,000 can be sold or given away free of capital gains tax. Although not a large amount of money, this can be an easy way of reducing the value of your estate.
Take out life insurance and ensure it is set up tax efficiently
Any life insurance benefits should be assigned into trust rather than being paid to the (taxable) estate of the insured.
Make a gift to charity
Gifting to charity will be taken off the total value of your estate before Inheritance Tax is calculated. If you leave more than 10% of the total value of your estate to charity, the Inheritance Tax rate will be reduced to 36%.
Make sure cash is accessible
Having funds available for your family should you die can be important. It can be particularly helpful in the short and medium term, for example, enabling your husband, wife, partner or children to settle outstanding bills.
Business Property Relief can help reduce Inheritance Tax
Business Property Relief is available on certain types of investments. Investments in many AIM or EIS (Enterprise Investment Scheme) shares may qualify for 100% relief.
AIM shares or EIS can be volatile and illiquid compared to traditional investments, so appropriate reasons for investing are very important, rather than just for tax planning purposes.
For those with a higher investment risk profile, this may be a way to diversify and investment portfolio, as well as reducing Inheritance Tax.
Are you concerned about Inheritance Tax? Are you worried that your family may have pay a substantial amount of Inheritance Tax? Contact us to today. We can review your current situation and let you know what options are available to you.
If you would like to talk to about financial planning, please get in touch for a no-obligation meeting. Go to our website www.miadvice.co.uk and contact us via our “Get in touch” form on our home page or Contact Martin Dodd on 01902 742221.
Email us at firstname.lastname@example.org
It is advisable to take advice from a professional financial adviser when making major financial planning decisions.
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This article has been prepared in good faith and based on Midlands Investment Agency’s understanding of the law and interpretation thereof at the time of creation. The contents should not be regarded as specific advice and we always recommend that specific advice is sort from a qualified professional. No responsibility can be accepted by Martin Dodd or Midlands Investment Agency Ltd., for any loss that may occur by a person acting or refraining from acting on the basis of this article.