What better way to kick off 2018 than by resolving to be as tax efficient as you possibly can! Just think how good you’ll feel, having taken decisive action to protect the wealth you intend to pass on to your beneficiaries in the years to come.
Worryingly, it appears that more and more estates are getting caught in the IHT web. According to HM Revenue and Customs, inheritance tax payments reached record levels in 2017, with IHT receipts hitting £5.3bn in the year to November 2017, up from £4.7bn on the previous year.
Why on earth would you want to be adding to those statistics over the next 12 months?
Research has shown that failure to take advantage of the tax breaks which are available when transferring wealth from one generation to the next, is one of the major reasons why so many families are being clobbered with the maximum 40% IHT rate. For those individuals who may be asset rich but cash poor, this can be especially distressing.
BUT, the good news is that there are a number of ways to avoid these hefty charges. Below, we’ve outlined 10 easy steps to soften your IHT liability or keep out of its clutches altogether.
1. Consider lifetime gifts and “potentially exempt transfers”
During your lifetime, you are at liberty to gift cash or assets to your loved ones, reducing or potentially exempting those items from IHT. Each year, the liability on gifting reduces by 20%. And if you live for more than three years after making the gift, then liability would cease completely after seven years.
2. Make gifts to friends and family
Each year, the following gifts are IHT exempt:
- £3,000 (valid for one year’s unused allowance to be carried forward to the next year, amounting to 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.
- Multiple small gifts of up to £250 per person per year, if they haven’t already benefitted from other gifts.
- Gifts made as part of a regular pattern of giving. There is no limit to the amount which can be gifted
3. Ensure your will is up-to-date
Make sure that you have written a will. Review it periodically to ensure your current wishes are reflected, should any changing family circumstances need to be addressed.
4. Check your estate won’t breach the nil rate band
Keep an eye on the approximate value of your estate, so that you can take appropriate action to reduce the amount your IHT beneficiaries may have to pay, if the value increases significantly. The rules state that:
- Estates worth up to £325,000 can be bequeathed without any IHT. For married couples and civil partners, this nil-rate band can be transferred to a surviving spouse – effectively doubling the nil-rate band to £650,000.
- Additionally, there’s now an additional nil-rate band where individuals can pass on a property to direct descendants. This is worth an extra £100,000 free of tax in the current tax year, rising to £175,000 by 2020/21.
5. Set up a Trust
If your estate is likely to exceed the nil-rate band, you may want to consider setting up a trust, to shelter your assets from IHT. By doing so, you’ll be handing over your assets to trustees who will look after them on behalf of the beneficiaries. (At Sterling, this is a proven, successful and extremely common practice). As a result, these assets will no longer form part of your estate for IHT purposes. Peace of mind!
6. Avoid Capital Gains Tax
A simple way of reducing the value of your estate would be to sell or give away any assets worth less than £6,000, so that they can avoid any capital gains tax (CGT).
7. Take out tax efficient life insurance
By ensuring that any life insurance benefits are assigned into trust will prevent them being included within your taxable estate.
8. Make a charity bequest
Charity donations will be taken off the total value of your estate prior to IHT being calculated. If you leave more than 10% of the total value of your estate to charity, however, the IHT rate will be cut to 36%.
9. Have cash that’s accessible
It is always useful to have a reasonable amount of cash available for your family to fall back on after you die. This can be used by a spouse or children to settle any outstanding bills that may arise in the short term.
10. Apply for Business Property Relief
There is also the possibility to apply for Business Property Relief (BPR). This can be made available not only on a family business, but also on any company land, property or equipment. Furthermore, it can also be taken on unquoted shares, so that investments in many AIM or EIS (Enterprise Investment Scheme) shares may qualify for 100% relief.
As 2018 swings into action, there are plenty of options open to you to resolve any IHT issues.
If you have any concerns about your potential exposure to IHT, then Sterling are best placed to provide all the advice and assistance you need. In the first instance, contact Andy Cowin on 01624 611146 or email andy@sterling.im
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