Inheritance Tax, a ‘Voluntary’ Tax?
Nigel Lawson, the former Chancellor of the Exchequer, once described inheritance tax as a voluntary tax. He was quoted as saying, ‘you can either do nothing and volunteer to pay it, or you can take steps to avoid it’. Last month we considered Inheritance Tax and its various implications. This month, we provide an insight into how to ‘take steps to avoid it,’ by planning ahead and using the exemptions and reliefs available.
Below, are details of some of the most common reliefs and exemptions used to mitigate Inheritance Tax liability.
You are able to give away £3,000 per annum tax free. This is extended to £6,000 if the exemption was not used the year before. You can continue to make this gift annually and no survivorship period is required for this exemption.
Small gifts of up to £250 per year can also be made tax free, to anyone you wish. There is no limit on the number of recipients in one tax year.
You also are able to make gifts to someone getting married or entering into a civil partnership, Inheritance Tax free. Parents can give £5,000 to their children. Grandparents can give £2,500 to grandchildren and others can gift £1,000.
Invest in qualifying assets
Select business and agricultural assets which qualify from 100% relief from IHT, following two years’ ownership. This is most definitely something to give consideration, where there is a better chance of surviving two years but perhaps not seven. There are numerous investments which attract the relief but it is important to take expert advice. If you already own assets which you think qualify for these reliefs you should check with your solicitor or accountant that they really do qualify.
Pensions are another efficient way to reduce your Inheritance Tax bill. If you die before the age of 75, funds within a money purchase pension pass tax-free to any beneficiary. After the age of 75, funds are taxed at the beneficiaries’ marginal income tax rate.
Trusts are an effective, albeit complex, means of reducing an Inheritance Tax bill. They are often used where there is a requirement for a degree of control or protection over your assets and how they are used by future generations.
Life assurance can be taken out to cover or reduce your prospective Inheritance Tax bill. Where the policy is written into a trust, the proceeds of the policy will not be included as part of your estate.
Without a doubt, inheritance tax planning is a complicated matter and there is an extremely fine line between ensuring that you retain sufficient assets to cover your life, whilst limiting the potential Inheritance Tax liability that could arise on your death. Specialist advice and careful planning are key to striking a fair balance a voluntary tax and an obligatory liability.
Please pick up the phone and give us a call on 01228 552222 if you wish to discuss any aspect of this article.