Inheritance Tax is a significant problem for ordinary people and no longer confined to the wealthy. In fact, the majority of Inheritance Tax is actually paid by ordinary people who didn’t realise that there was a problem until it was too late. The super-rich often pay very little because they know they have a problem and can afford the best advice.
So what’s the problem?
Putting it simply, if you die leaving assets such as cash or property with a value greater than the threshold for Inheritance Tax (the Nil Rate Band), the taxman will take 40% of this excess wealth. Even the new Residential Nil Rate Band is complex and won’t help you if your estate is worth over £2.2 million.
The Residence Nil Rate Band (or “RNRB”) is a complex topic, but we have created a video to help you understand it.
4 simple steps to reduce Inheritance Tax
There are many solutions available to reduce or even remove Inheritance Tax altogether, without losing control of your money and assets.
1. Make a Will now!
You may be surprised to learn that you can write your Will in a way that could reduce tax (and perhaps save on care home fees too). By using a trust that only comes into force on death you could protect your estate from the taxman and Social Services. Speak to a good solicitor for advice.
2. Consider setting up a family Trust
Trusts are a way of getting assets out of your estate but allowing you to retain some control over those assets. The two main benefits of putting money into Trust are that these assets may be excluded from your taxable estate, and the money in trust can go straight to the beneficiaries after your death. You can avoid lengthy delays by avoiding the need for Probate (or Confirmation). This is a complex area requiring specialised advice and a good solicitor can help with this too.
3. Use your allowances
Consider giving away surplus income or capital. There is a range of allowances that won’t count against your Nil Rate Band such as:
- the annual gift allowance of £3,000, doubling up to £6,000 in the year of death
- gifts out of surplus income
- Gift on marriage of a child or grandchild
But be careful, because if you give away more than your available Nil Rate Band you may have to pay some tax now.
And in some cases the order that you make gifts can be important too, so you need advice.
4. Speak to a Financial Adviser
A good Independent Financial Adviser (IFA) can recommend solutions to help you reduce or even eliminate IHT altogether.
A Discounted Gift Trust plan gifts money to a trust, while retaining a right to regular “income” payments. Part of the gift is treated as immediately exempt from tax. The rest takes 7 years to become exempt.
The discounted gift trust may be suitable if you are under age 90, in good health, and have surplus capital that you will never require in the future. They are particularly suitable if you need to obtain regular withdrawals.
A range of investments take advantage of the Business Property Relief (BPR) available on certain company shares which gain a full exemption from inheritance tax after the shares have been held for 2 years. Business Property Relief has been in existence since 1976.
Some companies have developed solutions that provide flexibility in providing income from a gift that reduces your taxable estate.
Finally, if you can’t afford to lose access to your money or assets you can gift the payment from a life insurance to your beneficiaries. This can often be a competitive way to make sure that tax gets paid without having to set aside cash.
How we can help
For many people the right solution is often a combination of approaches. By carefully structuring the planning we can help you to achieve the right balance between keeping accessible money and reducing tax.