Inheritance Tax Planning

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Inheritance Tax Planning

Claire Dentith APFS, Dip PFS, MAQ

Director, Chartered Financial Planner

Claire Dentith joins the Pension and Investments Podcast to tell us all we need to know about Inheritance Tax Planning.

What exactly is inheritance tax?

Put simply, it’s a tax that you pay on your total estate value on death. Your total estate value will include any property, your savings, your assets – which could be things like your cars, jewellery, clothes… All of that has a value. On death, anything that exceeds your allowances will effectively attract a tax charge at 40%.

What are your inheritance tax allowances?

Everybody has an allowance of £325,000. If you own a residential property, you also have an allowance of £175,000 on the value of your property. But you can only claim that if you are going to be leaving property to a direct descendant: a child.

As a married couple or civil partnership, you inherit one another’s allowances. So potentially you could have an estate worth up to £1 million before you start having any issues with inheritance tax.

But it really depends on the person’s position, whether you’re married, whether you own property and the value of it. Plus, if you do have children, whether you would be leaving that property to them.

How do you avoid inheritance tax?

The key thing is you can’t specifically avoid paying tax. It’s technically a criminal offence. However, through a bit of planning and the use of legislation you can reduce or eliminate your inheritance tax.

Examples are to make outright gifts, using trust-based arrangements, pensions or something called property relief. Also, gifts to charities and political parties can also help to reduce your estate value, and therefore the tax liability.

How do the rich avoid inheritance tax?

The rich are no different from us. They follow the same rules, regulations and legislations that we do. It may be that they choose to give more away to charities because they’ve got a larger estate – that can be a good way to reduce tax liabilities. They don’t have any allowances over and above what the rest of us have.

How do I avoid inheritance tax with a trust?

Trust based planning can be a very complex area. Anybody looking at that would really need to take specific advice on their actual position. The key thing to highlight is you can put assets into trust and effectively once this has been set up for seven years, in theory, the assets within that would fall outside of your estate.

A challenge with this is where people put things into trust but still want some kind of benefit from them. So for example, you put a property into trust, but you still want to live there. Technically, that would undo the use of the trust because you still receive a benefit.

There are ways to mitigate that, in that you can pay market value rent to continue to live in the property. But not everyone will want to do that. So it’s a complex area, so if you’re considering that, it’s best to seek advice.

Speak To An Expert

The future can seem uncertain but one thing you can be certain of is CD Financial are here to help and protect your future. We understand how difficult it is to understand the ins and out of money which is why we will do it for you.

How to avoid inheritance tax after death

Unless someone makes plans to mitigate tax before they die, there is nothing that can be done once a person has passed away. Your estate is your estate, as valued at that time.

So if people are worried, they need to think about it long in advance. It’s not an easy thing to think about and discuss, but it’s important. There’s nothing you can really do after the fact.

How to avoid inheritance tax on farms

This is a big thing because farms tend to have lots of properties and high value assets. Technically, most farms will probably fall under something called Business Property Relief, which means that potentially passing the farm down may actually be exempt from inheritance tax. But there are certain criteria that would need to be met.

It would have to be trading as an actual business at the date of death, for example. Again, this is something that would be very individual to the person’s circumstances and how the business is set up. It’s another one to speak to an advisor and probably an accountant about.

Can I buy my parents house to avoid inheritance tax?

The answer is yes, you can, but you’d have to pay market value, and the money that they receive from you would still form part of their estate. So unless they spend that money, it may not actually resolve any issues with inheritance tax.

Can I give my house away to avoid inheritance tax?

If you gave your house away and you moved out, yes. But you’d have to live for at least another seven years, otherwise it may still form part of your estate.

But if you gave your house away and still lived in the house, that would be classed as a gift with reservation. So it would still form part of your estate unless you paid market value rent to continue living there.

And even then you’d have the seven year rule, because it’s a gift. So the property would have had to have been gifted for seven years for it to fall completely out of your estate.

Does a Deed of Variation avoid inheritance tax?

No, not in the first instance. Where a deed of variation can be useful is, let’s say, where grandparents have passed away and money is being passed down to children, but that child themselves has a son or daughter. If they have an inheritance tax problem already, they can vary the will so the money doesn’t go to them. It may pass straight to their children, removing a potential inheritance tax liability from the person receiving the money.

But it won’t remove an immediate tax liability if the person has just died and it is being passed down to them as a beneficiary.

How much can I give away to avoid inheritance tax?

In theory, you could give away absolutely everything. But if you were giving funds away over and above the nil rate band, the £325,000, you may incur immediate tax charges.

Then, there’s the fact that having made the gifts, you have to then survive seven years. And of course you still need the funds to live your life. So yes, you could, but would you want to?

Speak To An Expert

The future can seem uncertain but one thing you can be certain of is CD Financial are here to help and protect your future. We understand how difficult it is to understand the ins and out of money which is why we will do it for you.

Can executors donate to charity to avoid inheritance tax?

They can, and it can be quite a useful part of planning. If you have specific charities that you want to give money to, you state the details in your will and an executor could elect to give the money to charity to reduce inheritance tax liabilities and also obviously help a good cause.

Can I avoid inheritance tax with a SIPP, a self invested personal pension?

Yes. And it doesn’t necessarily just extend to SIPPs. Any pension arrangements that hold a value – a personal pension, a drawdown account etc, they are exempt from your estate. So if people have large sums of money in savings and investments, they’d often use that to fund income before taking money out of pensions if there is an inheritance tax issue.

Can inheritance tax be avoided with a limited company?

Yes, a limited company may also fall under the business property relief legislation mentioned earlier with farms.

Again, it will come down to certain criteria being met, and unfortunately it wouldn’t include limited companies set up for Buy to Let property portfolios – these are not deemed to be an actual trading company. Again, it’s a complex area but if you’re a trading limited company, you could pass that business on without actually forming part of your estate.

But if the company was liquidated to give funds to your estate, that’s a different scenario and would be taxable.

Does a joint bank account avoid inheritance tax?

Spouse to spouse transfers are actually exempt from inheritance tax. So if, for example, I died today and passed everything to my husband, nothing would be subject to inheritance tax.

Inheritance tax would only apply when my husband dies. At that point, if that joint account forms part of the estate and we have liabilities, then the tax would be payable.

Speak To An Expert

The future can seem uncertain but one thing you can be certain of is CD Financial are here to help and protect your future. We understand how difficult it is to understand the ins and out of money which is why we will do it for you.

Can I use equity release to avoid inheritance tax?

The simple answer is you certainly can, as long as you spend all the money.

Does getting married avoid inheritance tax?

Yes, it can. I have worked with lifelong couples that weren’t going to get married that decide to for this purpose. Spouse to spouse transfers are exempt, and when one person dies, if you are married or in a civil partnership, you inherit the other person’s allowances.

Everybody has a nil rate band of £325,000. If you are single, that is the only allowance you have. If you are, however, married on your death, that allowance passes to your partner.

On that person’s death, they can use their own nil rate band of 325,000 plus yours – so a total of £650,000. Plus, if you own a property, the residence nil rate band of £175,000 per person can also be inherited, subject to the property value and it being left to direct descendants.

In theory, that means a married or a couple in a civil partnership could actually have an estate value up to £1 million with the property allowance, before inheritance tax becomes a problem.

So in simple terms, yes, being married or in a civil partnership can help to reduce your inheritance tax liabilities because it makes better use of both of your allowances.

How can I get more advice on inheritance tax?

Inheritance tax is very personal, and relates to your individual circumstances – and it’s also a very complex area. We typically work with accountants and solicitors to make sure that everything marries up with current tax planning rules.

If you have any questions at all, get in touch – call the office or email us and we’ll be happy to help.

HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen. Tax and Trust advice is not regulated by the Financial Conduct Authority.