There are various commonplace strategies for eliminating or reducing the need to pay IHT. Here is a very brief guide.
Gifts and IHT
One of the most popular ways of avoiding IHT is to make gifts to your loved ones while you are alive, rather than waiting for them to inherit after you have passed away. By making gifts you can reduce the value of your net estate, and therefore reduce or eliminate altogether your liability for Inheritance Tax.
The downside of this is that once you have gifted an asset you lose control of it, so this strategy only really works for people who can afford to dispose of assets while they are alive.
There is no financial limit on the gifts that you can make and no restrictions on who may receive them.
Once the gift has been made it is referred to as a PET, or ‘potentially exempt transfer’. As the name implies, the gift is only ‘potentially’ exempt from Inheritance Tax. You must live for a further 7 years for the gift to become fully exempt. If you die within 7 years of making the gift then it will be taken into consideration when the IHT liability is calculated on the estate, though credit will be given for the period of time you survived after making the gift.
A 20% reduction of IHT on the gift is allowed if you die within three to four years of making it. This rises to 40% if you survive four to five years after making the gift. It’s 60% if you survive five to six years and 80% if you die in the final year.
Annual IHT free gifts of £3,000 are allowable and you can make as many tax free gifts of £250 per year as you like.
Gifts made to your spouse (or civil partner) are exempt from IHT, as are gifts to charities.
Special rules also apply to marriage gifts. Parents can gift their children up to £5,000 tax free. The figure is £2,500 for grandparents and £1,000 for anyone else.
Property and IHT
You can give away your property and as long as you move out it will become exempt from IHT after seven years. If you give away the property and continue to live there, without paying a market rent – which the new owner pays income tax on – then the property will be classified as a “gift with reservation of benefit”. This could mean it remains subject to Inheritance Tax although there is an exception to this rule if the gift is to an adult child who lives with you and contributes towards the running costs of the home you share together.
Deeds of Variation and IHT
Where a person has already died, a deed of variation can be entered into to vary their Will or even their intestacy. This involves the Will being rewritten to make it more tax efficient. It must be done within two years of the death and requires the consent of all the beneficiaries.
Marriage and IHT
Unmarried couples are treated as two single people for the purposes of calculating IHT and do not therefore benefit from the transferable nil rate band.
Marriage can therefore be tax efficient from an IHT perspective. It does not matter when the marriage takes place and death-bed marriages will be effective as long as a valid new Will is made that leaves everything to the new spouse.
Planning for IHT in your Will
It’s important to consider IHT when your Will is prepared. Our lawyers will advise you on strategies to avoid (or reduce) your inheritance tax liability and can draft your Will so that it is fully tax efficient.
For further details on how IHT may affect you and your family and how we can help you save money by preparing tax efficient Wills, call us on 01271 372128.