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Inheritance Tax hacks - plan now to reduce your liability

View profile for Elizabeth Young
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Much of my time is spent advising on Inheritance Tax (IHT) and the ways in which people can reduce their liability. After all, IHT is very often viewed as a voluntary tax as there are legitimate ways in which the liability can be reduced and, in some cases, avoided altogether.

This made me think that it would be worth sharing some of the lesser known tax benefits that are freely available, but not necessarily freely publicised - certainly not by HM Revenue & Customs (HMRC). 

In simple terms, IHT is payable at a rate of 40% on assets that exceed £325,000 in value. Unfortunately, the IHT threshold hasn’t altered since April 2009, although we have seen a slight change following the introduction of the Residence Nil Rate Band (RNRB) in April 2017.

However, the application of the rules in respect of the RNRB is unnecessarily complex and it is not an allowance that is available to everybody; there are very strict requirements as to who should benefit in order for the relief to apply.

So, making use of exemptions that are freely available becomes even more important, especially at the end of the financial year, as some of these exemptions can be carried forward for a single tax year only. 

So, what steps can be taken to reduce your IHT liability in a straight forward manner? 

  1. Annual tax exemption

It is possible to give away up to £3,000 in each tax year, without any IHT consequence whatsoever. This is known as an annual exemption.It can also be carried forward for one tax year. Therefore, assuming you didn’t give anything away last year, you would have the annual exemption for 2017/18 and also the exemption for 2016/17.

  1. Individual gift allowance

There is an individual gift allowance of £250 to any number of people. This is in addition to the £3,000 annual exemption, although beware because if you were to give an individual, say, £300 that figure would eat into your annual exemption. However, people who benefited from your annual exemption wouldn’t be able to receive this exemption as well.

  1. Gifts out of surplus income

One of the most overlooked exemptions, in my experience, is gifts out of surplus income. If you have a net income that exceeds what you need to maintain your standard of living then it is possible for you to give away the surplus. There should be a pattern to these gifts, and they should also be made on a regular basis. It is particularly important in this case that you keep very thorough records of the net income, what your general expenditure is and the “surplus” that you have available. For example, I often see grandparents making use of this exemption for the payment of grandchildren’s school fees.

  1. Wedding or civil partnership gift exemption

If you have a relative who is going to get married any time soon, it is possible for you to make use of a wedding or civil partnership gift exemption. For your child, this exemption is worth £5,000, for grandchildren or great grandchildren it is £2,500 and for any other person it is £1,000.

A combination of the above can work very well indeed. Making use of these exemptions on a more regular basis, over the course of many years, can lead to significant tax savings in the long term.

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