What can I do to reduce my Inheritance tax liability?
Unlike the UK, if you live in Australia, Canada, Portugal, there is no inheritance tax (IHT) – meaning the recipients or the beneficiaries take the whole lot. Compare this with France, where the rate is 45%, making it the third highest rate of IHT in the world. At 40%, the UK and the USA take joint position with the fourth highest rate.
Focusing on the UK, every individual has an IHT allowance of £325,000 (Nil Rate Band) the value up to which can be passed on death absolutely free of IHT. Subject to certain factors, anything above is taxed at 40%. Well, you’ll be glad to know that you can certainly take action in your life to minimise your overall IHT tax exposure when you are no longer here. Here are a few tips:
1. Gift away – The less your estate is worth the less IHT you pay, therefore, simply reduce the value of your estate in your lifetime. The simplest and cheapest way is to gift it away. I.e.; give away an investment property or a significant sum of money to a niece/nephew. The only catch is that you must survive 7 years from the date of making the gift to escape any IHT, otherwise the value of the gift eats away your £325,000 allowance.
2. Residence Nil Rate Band – Ensure that you give away a property (even a share) which you have lived in to your children or grandchildren on death. By doing this, you can benefit from claiming an additional IHT allowance. In the current tax year 2019/2020, this is £150,000 and in the following tax year this will be £175,000.
3. Re-directing Inheritance – if you are due to or have received a significant inheritance, instead of keeping it and inflating the value of your own estate, it is worth considering re-directing this to someone else (e.g. your children). This is achieved by executing a legal document (called a deed of variation) within 2 years of the deceased having passed away. Effectively, this diverts the gift to the new beneficiary as if made under the deceased’s will and bypasses the 7-year rule which would have applied had you accepted the gift and gifted it later on.
4. Life insurance/assurance policies – make sure these policies are ‘written in trust’. This simply means you specify the name of the individual you wish to receive the pay-out on your death instead of it going into your estate. On your death, this means the insured sum sidesteps your estate and goes straight to the named individual. The main benefits are that you escape paying IHT on the pay-out as it is not considered as part of your estate and it also evades the need to apply for a grant of probate. Practically, this means on your death, the sum can be claimed straight away.
On a lighter note – you can rest assured that you are not in South Korea where the IHT rate is 50% or in Japan where it’s a whopping 55% – making it the second most and most expensive countries respectively to die in the world!
Contact Oliver Fisher Solicitors where our friendly team can give you specialist advice tailored to your circumstances. Call us on 020 3219 0145 and get cracking with your estate planning now.
(DISCLAIMER– This article is only a general guide and does not intend to provide legal advice. The article also does not consider specific circumstances in which the above may not apply or be suitable, in which case, specialist legal advice should be sought).
By Samina Aslam, 2nd July 2019.