Life
Money Maven: Inheritance tax planning time
If you wish to protect your family from the taxman, then our personal finance expert has some advice
March 2, 2023 17:20
If you wish to protect your family from the taxman, then our personal finance expert has some advice
March 2, 2023 17:20The taxman received £5.9. billion into its coffers from inheritance tax (IHT) in the nine months to January this year, some 15 per cent more than in the same period last year.
With the threshold frozen at £325,000 until April 2028, research conducted by Wealth Club suggests the average inheritance tax bill could reach £288,611 by 2027/28, up from £216,000 in 2019/20.
While it may be difficult to avoid IHT altogether, there are ways to mitigate the amount you pay, if you want to. Firstly, make a will so you fully use up your allowances.
After making your will, the simplest way to reduce your inheritance tax bill is to give cash gifts to friends and family. Under the current rules, you can gift up to £3,000 a year split between as many people as you wish and it immediately falls outside your estate for IHT purposes.
You can also give up to £250 to any number of other people under the same rules. If you have a wedding to attend, you can give up to £5,000 if it’s your child’s, £2,500 to a grandchild or great-grandchild and £1,000 to any other person with no IHT liability.
If you want to give any other gifts, for example jewellery, furniture, cash, shares or property, you need to survive for seven years for them to fall out of the IHT net. After three years the amount payable falls on a sliding scale.
Finally, you can give gifts of any size out of normal income, so long as you can prove it is genuinely surplus cash.
Consider your pension. Your pension pot falls outside your estate when you die, so you could use up other assets to provide an income first.
If you have a defined contribution scheme, which is all personal pensions and the majority of company schemes these days, then the cash in the pot can be left to whoever you like. If you die before you are 75, they can take income from the pot tax free, if you are over 75 it will be taxed at their normal rate.
You need to tell the pension company who you want to inherit the pension in this circumstance.
However, if you have used the money to buy an annuity — which is a guaranteed income for life — unless you have a policy that continues to pay out a percentage to a spouse or dependent on your death, it will die with you.
People with a final salary pension need to ask their scheme administrators what their procedure is on death.
Putting your assets into a trust is another option, but seek professional advice as their creation comes with its own tax implications.
They do, however, allow you to control how and when your beneficiaries get the money, which could be useful if they are young children.
A further option is to invest in schemes attracting Business Property Relief such as AIM listed shares or Enterprise Investment Scheme (EIS), which are IHT free if they have been held for at least two years.
Rosanna Spero has been writing about money, property and small businesses for more than 30 years. She has worked for a range of magazines and newspapers, with much of her working life on the Money Mail section of the Daily Mail. She has also written a number of books on the subject. Email her with your questions at rspero@thejc.com