At the time campaigners were livid and demanded a new type of tax to stop wealthy individuals from doing this in the future. However, more middle class families are finding themselves impacted by larger IHT bills due to rising house and other asset values. But help is at hand and there are various ways of reducing IHT even if you don’t have an estate worth billions of pounds.
Passing on your pension
A pension can be used as a vehicle for IHT planning as it can be passed to your next of kin in your estate. The rules were changed a few years ago making it easier to protect the fund for your beneficiaries as pensions are not included as part of the estate for IHT purposes. The change in legislation means it can be passed on in its entirety without being subject to tax. Some IFA’s have suggested living off your ISAs – instead of your pension – meaning that the pension can be passed on without incurring any tax for you next of kin. It must also be mentioned, that ISA’s can’t be put into a Trust and as such form part of the estate for IHT purposes – so perhaps the idea of a large ISA pot to live on has some merits?
However, it is not quite as straightforward as this as some pensions may not have been set up in a contract that allows this – but please seek financial advice to make sure your pension contract does allows this, especially if you are planning to use this as a key foundation of IHT planning.
Convert your portfolio in to AIM or EIS companies
Converting your portfolio to invest in AIM or EIS companies means if will qualify for Business Relief (BR). This reduces the value of transferred assets liable to IHT either by 50% or 100%. And can be one of the most effective planning tools. BR is included on the transfer of unquoted company shares, which also includes AIM or EIS, and allows for 100% relief on IHT. There are various requirements, for example, the assets must have been owned by the person transferring the asset for at least two years before a for any BR can be given. Whilst this exercise allows for a generous relief on the qualifying assets, please be aware that there are a number of finer details to consider and without getting too technical, I would advise anyone considering this as a plan for IHT to speak to a financial planner to ensure all points are covered.
Give assets away seven years before you die
Many of our clients leave instructions on the distribution of their assets in their Wills. This is also important when these assets will potentially form part of their estate for IHT purposes. Others begin gifting when they are very elderly or infirm. But gifts count towards the value of your estate for seven years. There’s no tax on gifts that you would give from your normal income, such as Christmas and birthday presents which are ‘exempted: only those that have a larger value such as a property or a large amount of money. If you do decide to give a large gift but die within seven years then the gift is taxable.
How much tax you pay depends on exactly when you die because there is ‘taper relief’. Gifts are not counted towards the value of your estate after 7 years. Although there are instances which may cause you to pay tax on a gift, there are still means by which you can assist in distributing your wealth. Each tax year you can give money to your children, grandchildren or relative; assist with the payment of a dependent person’s living costs; or give money to charities and political parties. There are numerous options to begin distributing your wealth to those around you that you care most about, as long as you do so from an early date.
Leave it to charity
One of the longstanding loopholes of planning is that if you leave 10% of your estate to charity, the amount of IHT you have to pay falls from 40% to 36%. This can mean your loved ones will actually still receive 90% of your assets, but benefit from a huge saving on the amount of tax paid.
Historically, one of the most commonly used vehicles for mitigating an IHT liability was the whole-of-life insurance policy. This is an insurance policy written in trust, meaning that the resulting income from the policy remains outside your estate and therefore not subject to IHT. Whole-of-life policies differ from many others as they never run out, whereas many of their counter parts are limited to a set time-frame. As the policy does not have an end date they are generally more expensive than others with the premiums also higher, but as long as you continue to pay the policy the pay-out when you die is guaranteed. Of course these ideas may not allow your next of kin to live like a Duke, but if you begin planning early enough and factor your wealth effectively, it could allow for relations to look after all death duties in a more comfortable manner.