Inheritance Tax: Are you voluntarily giving money to the taxman?

29th September 2016

Record amounts of Inheritance Tax are being paid into the Government’s coffers.

Last year the figure soared by 22 per cent to £4.6 billion, and there is every indication that this will continue to increase over the next few years.

Figures just released by the HMRC show that since 2009/10 the amount of Inheritance Tax it has taken has increased by on average 12 per cent each year and is now at its highest levels since it was introduced in 1986.

This is partly due to the continued rise in house prices – up by 8.4 per cent in the last year according to the Halifax House Price Index – but also because the amount you can leave before paying Inheritance Tax has not changed since 2009.

And the Government has said the £325,000 threshold will be frozen until at least 2021. It means you do not pay tax on the first £325,000 of any estate, but anything above that is taxed at 40 per cent.

Changes are planned for 2017 with the introduction of the Residence NI Rate Band (which we will address in our next article), but in the meantime there are things you can do to reduce the impact of Inheritance Tax and make sure more of your money goes to your family and not to the taxman!

1. Make a will

Who you leave your estate to makes a major difference to your tax bill – anything you leave to a spouse or registered civil partner is free from Inheritance Tax.

If your spouse or partner has died before you, their £325,000 might also be carried forward so the first £650,000 of the estate would not be subject to tax.

2. Use your gift allowances

Each year, you can give away up to £3,000 free of Inheritance Tax, but there are also other allowances that you can use.

3. Give away your surplus income

Do you get a regular income, such as a pension, and find that you don’t spend it all? If so, you can give away more than the £3,000 each year free from Inheritance Tax.

4. Put money into your pension plan

If you have a pension fund and die before the age of 75, the death benefit can be paid to your heirs free of Inheritance Tax and free of income tax.

5. Make gifts to charities

Any money that you give to charities, during your lifetime and through your will, is exempt. A large amount of charitable legacies could mean the rest of your estate qualifies for a reduced rate of 36 per cent.

6. Qualify for business property relief/agricultural property relief

If you run a business or own a farm, that asset could qualify for 100 per cent relief, depending on the circumstances. Private investors can also access specialised investments that qualify for business property relief which makes the investment exempt from Inheritance Tax after just two years.

7. Put money in trust

Making gifts of substantial amounts can reduce your estate and the IHT bill, but to qualify you have to live for a further seven years. You can just simply give the money away to the family, of course, but do you trust them not to simply spend it all straight away? That’s why many people gift money to trusts, a legal arrangement of ownership, rather than just hand the money over.

8. Take out life insurance

If you do not want to give money away, or put it in trust, then you could consider taking out a life assurance policy and putting it in trust.

When the policy pays out on your death, the proceeds can then be used to mitigate the tax bill.

This doesn’t actually save any Inheritance Tax of course, it simply means that you will pay a regular monthly or yearly amount to an insurance company and an amount equal to the tax due on your estate can pass in its entirety to your heirs.