As more people are caught in the inheritance tax net and forced to pay thousands, an expert has explained the most effective ways to reduce one’s bill.
With the Office for Budget Responsibility’s recent forecast suggesting that IHT figures will hit £7.2 billion this year, Britons are urged to take the necessary steps to cut the hated tax.
Ben Harrison, associate financial planner at Equilibrium Financial Planning explained three of the most effective ways to reduce one’s bill
Gifting and the seven-year rule
He said: “Gifting to your loved ones is the easiest way to pass on your assets without paying tax.”
Every tax year, each individual has an annual exemption and can give away a total of £3,000 to loved ones without it being added to the value of their estate for IHT purposes.
This allowance can be split between several people, and if someone didn’t use it in the previous tax year, they can combine the figure and pass on £6,000 to be used in the following tax year.
Mr Harrison continued: “Wedding gifts made before a wedding are also exempt from IHT. Gifts to children must be worth £5,000 or less, £2,500 or less for a grandchild or great-grandchild, and £1,000 or less for a relative or friend. Gifting from surplus income, provided this is done on a regular basis and does not deteriorate your standard of living is also exempt from IHT.”
Other gifts which are also exempt from IHT are:
- Small gifts of up to £250 per recipient (provided they have not benefited from the above)
- Gifts to charities
- Gifts to a political party
Other gifts made directly to individuals, that are not immediately tax free, are classed as potentially exempt transfers (PET).
It is unlimited on how much people can gift, however, they need to survive for a minimum of seven years before these gifts leave their estate completely and are free from IHT.
He added: “If you die within the seven years of making the gift and have given away more than your nil rate band (£325,000 per individual), the gift will be taxed on a sliding scale between eight percent and 40 percent.
AIM share investment
Another way people can cut their bill is with Alternative Investment Market (AIM).
AIM shares were designed to help smaller companies access capital from the public market.
As they qualify for Business Relief, AIM shares are “a lesser known yet effective method to reduce your IHT bill”
Mr Harrison said: “If you’ve held the qualifying shares for at least two years at the time of your death, 100 percent of the value will be exempt from inheritance tax.
“To be eligible, the AIM company must also carry out the majority of its business in the UK and not be listed on another recognised stock exchange.”
Pension savings
Lastly, pension savings are a valuable way to pass on one’s earnings to loved ones as they don’t form part of their taxable estate, and there is no longer a limit on how much people can save over their lifetime before being taxed, given the recent removal of the Lifetime Allowance.
Mr Harrison continued: “Should you die before you have chance to spend your pension, you can nominate beneficiaries directly to your pension provider to receive it instead.
“It is important to remember that if you die after the age of 75, the nominated individuals will have to pay income tax at that marginal rate for any withdrawals made.
“Therefore, having a thorough understanding of the means available to reduce your IHT bill is key to leaving loved ones with the earnings you always intended for them to enjoy.”
