Spare Your Children From Inheritance Tax

The Inland Revenue has had some high-profile headlines recently. There was the case of the eBay seller who received a prison sentence for tax evasion. There are suggestions to allow the Inland Revenue to reclaim outstanding taxes from ISAs.  Now the Inland Revenue appears to have set its sight on Inheritance Tax planning.  The common factor in all of this, however, is that the Inland Revenue is pursuing large-scale and rather blatant tax evasion, rather than genuine tax planning.

Inheritance Tax – a controversial reality

Inheritance tax in its present form was introduced in 1986.  The existing nil-rate personal IHT band of £325K (£650K for couples) was announced in April 2009.  To put this into context, according to the House Price index the average house price in the UK in April 2012 was £229K whereas in April 2014 it was £260K. If property prices continue to rise and the IHT nil-rate band stays unchanged then increasing numbers of home owners are going to find that nearly the whole of their IHT-free allowance will be consumed by the family home.

A little forward planning can make all the difference

If you’ve managed to stay in control of the family finances, made savings and suitable investment decisions, then you may have a reserve you’d like to pass on to your children or a family member. Fortunately there are various options to reduce your IHT bill, these options are perfectly legal and in doing so will increase the value of the estate you leave behind.

Marriage and civil partnerships can reduce tax bills

Couples can reduce their IHT obligation by formalising their relationship, either by marriage or by a civil partnership. This has the benefit of the surviving partner receiving any unused portion of the deceased’s tax-free allowance.  This means they would inherit the unused amount as a percentage, therefore if the nil-rate band is eventually increased they and their family will benefit from the change.

Put your trust in a trust

Life insurance is for the people you leave behind. If the policy is put into a trust then when the time comes, the money to be released is treated separately from the rest of the estate. This means the proceeds can be obtained free of inheritance tax.  It can also be paid out much quicker than the remainder of the estate which has to go through the process of validation. This can help to soften the financial blow of bereavement giving those left behind time to focus on grieving for their loved one. There are many different trusts so getting some impartial advice from a professional financial adviser on this could be very helpful.

Give while you are still alive

When you die, only the value of the estate you leave behind will be subject to Inheritance Tax. Therefore if you reduce the value of your estate before you die, it will lower the cost of an eventual IHT charge. There are several rules regarding how much of your property you can give away in any year and guarantee it will be free of Inheritance Tax if you die. It is also worth bearing in mind that any gift becomes absolutely free of Inheritance Tax providing that the benefactor lives for at least another 7 years after donating it.  Even if they do die within this time, the Inheritance Tax charge may be reduced.  It is imperative, however, to note that to be eligible as a gift the donor must forfeit all interest in the item they give away.

You need to think carefully about the best way to reduce your potential IHT bill. For most people, seeking some unbiased financial advice from a professional financial adviser could make a big difference in terms of how much of their personal wealth reaches their loved ones rather than the government.