Legal loopholes that can help you reduce inheritance tax
Posted on 12th September 2022
Gifts – you can give gifts of up to £3,000 tax-free each year. It’s known as the annual exemption which you can carry forward for one year.
Everyone in Britain can give away small gifts, such as Christmas or birthday presents and gifts to charities and political parties, worth up to £3,000 tax-free.
These gifts can include wedding or civil ceremony presents of up to £1,000 per person, £2,500 for a grandchild or great-grandchild, and £5,000 for a child.
You can make payments to help someone with their living costs, such as an elderly relative or a child under 18.
Downsizing – you might consider selling your family home and moving to a smaller property so you can give money to your children. While IHT is relevant to assets you own when you die, it also applies to anything you might have given away in the seven years before your death.
The threshold before IHT comes into effect is £325,000 per person, and £650,000 for couples. Above this amount 40% IHT will be due. You can also claim an additional allowance of £175,000 to offset the sale of a family home so, as a couple you could pass on £1million without paying IHT.
If you plan to pass on a large amount from the sale of your property you must survive for a further seven years for it to be free of tax. If you die within that period tax is paid according to a sliding scale. And, of course, the value of your property might continue to increase so your children could be better off if you keep the property.
However, you can’t give your property to your children and continue to live in it due to the ‘gift with reservation’ rules. You would need either to pay market rent to them or live somewhere else.
A deed of variation – the beneficiary of a Will can pass their inheritance straight on to someone else without it entering their estate. If the original beneficiary already owns assets worth more than the £325,000 or £650,000 allowed for a married couple this might be an option.
All the beneficiaries must agree and the deed must be completed within two years of someone’s death. This might be a good option for grandparents if their children already have assets that exceed the IHT threshold. It could be used to pass their assets to their grandchildren instead.
Investments – some investments such as alternative investment market or 'Aim' shares are exempt from IHT to encourage long-term investment, as long as certain criteria are met.
Avoid intestacy – if you don’t write a Will those who inherit under the laws of intestacy could face avoidable IHT. For example, if you are a married parent and you die without a Will part of your assets could go straight to your children. They might then have to pay IHT if the amount they receive is above the IHT threshold.
If you had a valid Will you could have left more of your assets to your husband or wife, allowing more time to make arrangements to reduce the amount of IHT due when they die.
Capital gains tax – if you sell assets while you’re alive other than your family home or ISAs, capital gains tax (CGT) will normally be due on the profits you make, even if you give the money to someone else. If you do this you could lose the benefit of the £1m IHT threshold for the sale of a married couple’s home when your surviving partner dies.
Your pension – you can leave money remaining in your pension pot to someone and IHT will not be payable. If you have alternative sources of income you could live on these and reduce the amount of IHT your beneficiaries will pay. However, you will still pay CGT on assets you sell to support you in retirement and your lifetime pension allowance is limited to just over £1million.
If you would like to discuss how making a Will can help to reduce the amount of IHT your family might pay, please get in touch.
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