How to manage Inheritance Tax

Author: Jason Hemmings

The 2015/16 tax year has seen the amount of inheritance tax (IHT) collected by the Treasury rise by 20%.

HM Revenue & Customs benefited from freezing the IHT allowance in 2009, with receipts increasing year on year since. The 2011/12 tax year saw IHT receipts of £2.9bn, since then the receipts have grown a massive 60% to the £4.7bn collected in 2015/16, partly due to a lack of planning by many to avoid this so called “voluntary” tax.

However, there are steps you can take to potentially reduce your IHT liability. Consider using your annual gift exemption of £3,000 to immediately reduce your estate. If you haven’t used it before, you can carry forward £3,000 from the previous tax year, doubling up the gift exemption to £6,000. Couples can each use this exemption.

Small gifts up to £250 in a tax year to any number of people are completely free of IHT. Gifting excess income may also be exempt but there are a few requirements you need to follow.

Gifts when your children and grandchildren get married may also be exempted. Parents and grandparents can make one-off gifts on the marriage of children or grandchildren (up to £5,000 and £2,500 respectively).

Consider making larger gifts of capital – either into trust or outright to beneficiaries. The majority of these are potentially exempt from IHT and only become exempt if you survive 7 years from making the gift.  Planning early is important as is making sure that you can afford to give away some of your wealth.

Donations can also reduce your IHT liability, these can be made to registered charities or political parties either during your lifetime or via your will.

If you don’t feel you are ready or able to gift some of your wealth quite yet, consider investing in assets that qualify for business property relief (BPR). If you hold these for a minimum of two years they become exempt from IHT. BPR qualifying investments include qualifying shares in unquoted trading companies and shares in trading companies listed on the Alternative Investment Market (AIM). AIM shares can now also be held in ISAs, providing the potential for an IHT free ISA account.

Other investments such as Enterprise Investment Schemes (EIS) can also enjoy similar tax breaks from IHT as well as capital gains and income tax benefits.

If you don’t want to give away your wealth then consider setting in place a means to paying any IHT. Life insurance is an ideal way to insure any potential IHT due on your estate. These policies need to be correctly set up and written under an appropriate trust so the benefits don’t form part of your estate and are paid immediately to your beneficiaries to pay any IHT bill.

Seek independent advice from qualified professionals on how best to address your IHT concerns.