How to reduce the liability
The good news is that there are financial planning options available to reduce your Inheritance Tax liability or even exempt you altogether. Some of the options are fairly simple while others can include more complex schemes including gifts to family members or setting up trusts.
You need to give thought to your specific circumstances. You may be worried, for example, about handing assets to a child in a rocky marriage which you quietly think may end in divorce. In such as case your estranged spouse-in-law would make off with half the assets.
These sorts of concerns are, however, not a good reason for doing nothing. As Roy Jenkins said ‘Inheritance Tax is a voluntary tax, paid by those who distrust their heirs more than they dislike the Inland Revenue.’ The most important ways to reduce your potential liability are below.
Make a will
The most essential advice in the context of reducing the liability is that you must make a will. You should then review this will on a regular basis and update it as and when your circumstances change.
This will allow you to set in place an ongoing structure to ensure that no more Inheritance Tax is paid than is absolutely necessary.
Take full advantage of the spouse exemption and spouse relief
Assets left to a spouse are not taxed. In addition, the new spouse relief introduced in 2007 made the individual Inheritance Tax thresholds transferable between spouses.
This allows a couple to combine their individual allowances thereby making the first £650,000 of an estate tax free.
Make full use of allowances
You should give away as much as you can in your lifetime. These unlimited transfers (known as potentially exempt transfers ‘PETs’) are fully exempt from Inheritance Tax provided that you survive for seven years after making the transfer. There is some relief if death occurs in the seven year period.
As mentioned in the section on how to calculate Inheritance tax, you are also entitled to give away up to £3,000 tax free each year. If this annual exemption allowance is not fully utilised, it can be carried forward to the following tax year.
Likewise, full use should be made of the unlimited number of £250 gifts and gifts out of normal, habitual expenditure.
Avoid retaining beneficial interests
If you transfer an asset, such as a house, it is essential that you do not retain a beneficial interest. If an interest is retained, the gifted asset (known as a gift with reservation) is still treated as part of your estate for Inheritance Tax purposes.
Newly introduced legislation has stopped the use of sophisticated schemes, such as life interests and double trusts, to avoid the gift with reservation rules. If you have one of these schemes in place, you should take professional advice in considering the alternative options now available to you as the legislation is retrospective.
Make use of trusts
You may also want to consider using a specialised trust such as a Discretionary Will Trust to mitigate your potential tax liability. A trust is a legal arrangement that allows you to give away assets such as money, property or shares in a tax efficient manner and on terms determined by you to beneficiaries chosen by you.
The actual mechanics of setting up a trust are fairly complex and it is important to ensure that any trust is tailor made to suit your specific needs.
Take professional advice
If you think you might have a potential Inheritance Tax liability, you should consider consulting a solicitor or other professional adviser who specialises in tax planning.
Inheritance Tax planning is usually a complex and long term affair and ongoing professional advice will be essential. The earlier you get started the better.
The information which we provide through Lasting Post is in outline for information or educational purposes only. The information is not a substitute for the professional judgment of a solicitor, accountant or other professional adviser. We cannot guarantee that information provided by Lasting Post will meet your individual needs, as this will very much depend on your individual circumstances. You should therefore use the information only as a starting point for your enquiries.