“Inheritance Tax is, broadly speaking, a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue” - Roy Jenkins (former Labour Chancellor)
One might reasonably assume that Roy Jenkins (former Labour Chancellor) woke up on the wrong side of the bed before formulating this line, reflecting both a harsh analysis and an oversimplification of the law. Nonetheless, one point rings true – there are plenty of legitimate tax-planning techniques available to those concerned about their exposure to Inheritance Tax (IHT). Here are our top five tips for simple strategies that might make a big difference to your IHT bill:
1. Make use of small gifting allowances
Gifts made within the seven years prior to death are usually brought back into the estate for the purposes of calculating Inheritance Tax. However, normal gifts (i.e. birthday or Christmas gifts) are excluded, and you are additionally entitled to give up to £250 per year to any individual tax-free. You can repeat that (within the same tax year) for as many individuals as you like.
2. Use your annual gifting allowance:
Beyond the smaller exemptions outlined under point one, you are additionally entitled to make up to £3,000 worth of gifts tax-free in any given year. So you can give small gifts of up to £250 to as many individuals as you like, and still make additional larger gifts totalling £3,000, all in the same tax year. Over time, this can make a significant dent in your assets.
3. Consider making gifts out of excess income
If you receive income in excess of the amount required to maintain your usual standard of living, you may use the excess to make tax-free gifts. The rules in relation to this type of gifting are more complex, and in most cases, should be guided by professional advice.
4. Keep charity in mind
Any lifetime transfers to charity are tax-free, as are charitable legacies included within your Will. If you leave 10% (or more) of your overall estate to qualifying charities, you will pay IHT at the reduced rate of 36%.
5. Make full use of a private pension
Private pensions are held within a trust structure, which means that the benefits can bypass your estate when they are paid out to your nominated beneficiaries. With the assistance of a pensions adviser, increasing the sums paid into your pension can play a useful role in mitigating your IHT exposure.
Contrary to Mr Jenkins’ statement, there are a whole host of reasons why you might not be dealing with tax planning – but there’s one very good reason to tackle it now, as many of the most effective strategies involve small changes over a number of years. Members of our Private Wealth & Tax team have extensive experience in assisting individuals and families with their tax affairs, and if you’d like to find out more about steps you can take to make savings, we’ll be happy to discuss your options.