Top Ten Tips: Inheritance Tax

1 The other half If you’re married it, it will in most instances be best to leave everything to your spouse. Regardless of the size of the estate, inheritance tax is not charged where left to a United Kingdom-domiciled spouse (or civil partner). This defers the problem until the surviving spouse dies, but it is presumed that by that time the value of the estate will have been diminished and, by implication, so will exposure to inheritance tax. When the widow or widower dies, the balance of the deceased’s assets (including the main home) of more than £650,000 will normally be subject to inheritance tax at  40 per cent.

2 Seven-year hitch You can gift assets to a beneficiary during your lifetime, rather than waiting until they pass on posthumously. Should you survive for at least seven years after making the gift, then it will not be deemed part of your estate. This rule exists to prevent individuals signing  over their assets on their “deathbed” in order to avoid inheritance tax.

3 Use your exemptions A gift up to £3,000 a year will be excluded from the seven-year rule (above). A couple can gift £6,000 a year between them and if no gifts were made in the previous year this can be doubled to £12,000. Exempted gifts can also be made in respect of a marriage at the rate of £5,000 for a child, £2,500 for a grandchild and £1,000 for anybody else. You can also gift up to £250 a year to any number of other persons.

4 Distribute excess income Regular distributions of income received will also be exempt from the seven-year rule if that income is deemed to be excess to your normal living requirements. Distribution could be in the form of a simple standing order to a child or premiums payable in respect of a life assurance plan.

5 Gift money to a trust If your concern is that the ultimate beneficiaries (eg: children) of your estate may be too young when you die – or you’re not sure if they should receive a bequest at all – you can gift the money to a trust. Often it may be best to use an investment bond for this purpose to minimise the costs and administrative burden involved with the tax and reporting requirements for trusts. This can allow relatively modest sums to be placed into trust.

6 Trust types The problem with giving assets away (particularly to a trust) is that you cannot normally benefit from them again. Discounted gift trusts and loan trusts act as a sort of “halfway house” for giving assets away as they enable the donor to retain access to either a stream of income or the full capital value of the gift.

7 Life assurance This won’t reduce the potential inheritance tax liability but it will provide your named beneficiaries with a means of paying it. Although you may feel that gifting the asset itself is a sufficient gesture, a problem can arise if the beneficiary receives an asset with a tax liability attached. The plan can be set up to last seven years to match a gift made during your lifetime or a “whole-of-life” plan can be used to cover the assets that you will take to the grave.

8 Shares Businesses, unquoted shares and agricultural assets held for two years (seven years if it is a let farm) may also qualify for exemption from inheritance tax. Clearly, it is not easy to buy a business or a farm for this purpose, but one option is to buy shares listed on the Alternative Investment Market. These are quoted shares but for this purpose are defined as unquoted shares. They are, however, shares in relatively small companies and so typically high risk.

9 Help a charity Assets left to charity are exempt from inheritance tax, giving relief of 40 per cent. Further to this, the government recently introduced rules which mean that if you leave to charity 10 per cent of the part of your estate that would be subject to inheritance tax, the rate is cut from 40 to 36 per cent. Charitable giving is often favoured by those without close blood relatives but anybody can take advantage of these exemptions.

10 Spend it! Clearly the easiest – and often most enjoyable– way to reduce the potential inheritance tax liability is to ensure that your estate is worth less than the allowance when you die. The cost of care in later years may be sufficient on its own to produce this outcome, of course, and it is important to keep enough in case you happen to live for longer than expected.