Posted on 13/11/2024 by Nigel Cobb
Given the Government's recent budget announcements, which are subject to consultation and legislation, now may be an opportune time to look at inheritance tax planning. Whilst this can take the form of complex trust arrangements, below are some key IHT mitigation strategies to consider:
An often overlooked but simple and effective method of reducing the value of your estate which you will hopefully derive some personal enjoyment from!
As detailed below, there are certain types of gifts that will fall outside of your estate immediately for IHT purposes. Any gifts that are not immediately tax-exempt or within the annual allowances are treated as potentially exempt transfers (PETs), where you can make gifts of unlimited value which will be exempt from IHT if you survive for a period of seven years. If you don’t survive the gift by seven years, the PET forms part of the value of your estate.
Annual Gift Allowance of £3,000. You can use the previous year's allowance to combine to £6,000.
Small Gifts of £250. As many as you like provided they're not to the same person.
Wedding Gifts - £5,000 to a child, £2,500 to a grandchild/great grandchild.
Gifts to charities and political parties.
Gifts from Income. You can make regular gifts from your surplus income if it doesn't affect your normal standard of living.
Lifetime Gifts. PETs and gifts into trusts are lifetime gifts and affected by the 7-year rule.
Gifts to charity - one key consideration to note is if 10% of your net estate (i.e. the value of your estate above the tax-free allowances) is gifted to charity on death, the rate at which IHT is charged on your taxable estate falls from 40% to 36%. This can significantly reduce any ‘cost’ of a gift to charity and ultimately the amount of your estate that is paid to the taxman.
Set up a life assurance policy – although not mitigating IHT, a life assurance policy can ensure that your Executors have sufficient funds to cover the IHT liability. It is important to write the policy in trust, so it doesn’t form part of your estate, and the payment is available for your executors prior to any required IHT payment.
Invest in business relief assets – initially aimed to allow family businesses to be passed through generations without the need to be sold or broken up to pay an IHT liability, business relief can be received on certain qualifying investments. Whilst there is a 7-year rule for most gifts, following the budget announcements, it would appear that the first £1million of business relief assets can be passed on to beneficiaries free of IHT, with any amount over this enjoying a relief of 50%, if held for at least two years and at date of death, and they allow for control of the assets to be retained.
It’s important to seek advice because your options are unlikely to be clear cut. Your Dentons Adviser can help you work out the right cover for your personal circumstances.
Although every effort has been made to ensure that the information provided in this article is accurate and correct, the information provided does not constitute any form of financial advice. We recommend that you take financial advice before making any financial decisions.
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