Inheritance Tax Tips: Eight ways to protect your family’s wealth

The most hated financial tax in the country may be the inheritance tax but it is a growing cash cow for the government.

Families paid a record £6.1bn in bereavement duties last year, an increase of £729m in the last 12 months.

Experts say rising home prices are partly responsible for the increase in real estate values.

At the same time, the threshold at which inheritance tax begins has been frozen at £325,000 since 2009 – and is expected to remain the same until 2025/2026.

This means that more ordinary families may find themselves stricken with the 40 percent tax, which historically affected only the wealthiest individuals.

Small wonder, then, that the subject of the Iraqi Supreme Court has become a hot topic in the Tory leadership contest.

Last week, Liz Truss promised a tax review if she became prime minister. The pledge is a relief to activists who say the system is too complex.

In January 2020, an all-party parliamentary group put out a white paper calling for reform of the Iraqi Supreme Court – calling it a ‘hugely unpopular tax’. But no change has been made in the two and a half years since then.

Currently, IHT is payable when your property value exceeds £325,000. Any gifts you gave in the seven years prior to your death will be considered part of your estate by HMRC.

This is known as the “seven year rule”. If you die within that time frame, taxes will be charged on a sliding scale, starting at 40 percent for the first three years.

Assets left to a spouse or civil partner are exempt. In these cases, your tax relief is passed on to them, and doubled to £650,000.

Furthermore, if you were to leave property to an immediate family member, such as a child or grandchild, you would also benefit from £175,000 ‘Main Accommodation Band No Price’.

In total, couples can give up to £1 million to their loved ones before inheritance tax is due.

These unfamiliar rules can make for an overwhelming read. Money Mail asked a group of tax experts to share eight tricks to help protect your family’s wealth from tax…

Don’t worry about that

A gift of up to £3,000 per annum tax free forms part of your Annual Relief. This can be given to an individual or divided among several. Or, you can carry forward the unused amount for one tax year.

You can also give £250 to as many people as you like in each tax year, as long as you haven’t used another allowance to give cash to the same person.

regular income

It will not charge you taxpayers for regular payments to your loved ones from your surplus income. This may be “relatively straightforward,” says Kieran Bowie, of the Law Society’s Wills and Stocks Committee.

Acceptable forms of income include your pension or money earned through rental property. There is no cap on how much you can give but it cannot affect your standard of living, so it should only be given after you have paid all your other living expenses.

You must be able to prove that these payments were made regularly – monthly, annually or semi-annually.

They are covered by the “normal expenditure of income” exemption, and so are not subject to the seven-year rule.

wedding gifts

You can donate up to £5,000 for your child’s big day without it being included in your annual grant allowance. For a grandchild or great-grandchild, you can give £2,500. The allowance drops to £1,000 for everyone else.

Check out the pension

Any money left over within specified pensions after your death is outside of your estate and is exempt from the IHT.

Although this is not the case if you have already purchased an annuity.

If you are a member of a defined benefit scheme, there is no “pot” you can pass on but there may be a provision for a spouse or dependents.

Annuities are “invaluable” to lowering IHT bills, says Anthony Kinaston, of Ash Ridge Asset Manager, so be sure to check your policy regularly.

Be charitable

Donating up to 10 percent of your estate to a charity or political party means that the rate of inheritance tax payable on your remaining wealth drops from 40 to 36 percent.

All charitable donations are tax deductible, so any donations from your property will reduce your IHT bill.

Invest wisely

If you choose to invest in companies listed on the Specialized Alternative Investment Market (AIM), which cater to smaller, riskier companies, the tax may not be due if they die within two years of making the investment — instead of seven.

This can be very risky because stock markets are volatile and you could lose money. But John McCaffrey of the accounting firm Alexander & Co says, “You have to have more than 40 pcs to be too bad to get an IHT bill.”

life insurance

A life insurance policy can guarantee a quick, tax-free payout for your family. Money usually forms part of your possessions – but not if you write it “in trust”. This allows you to designate one or more beneficiaries who will pay the full amount upon your death. You can insure your life at the estimated value of your IHT bill.

However, the premiums can be high — especially as you get older. You may want to ask a financial advisor to help make this type of arrangement.

Create a relationship of trust

A trust can allow you to transform your wealth over time, says Natalie Jacques, of investment management firm Sanlam. You could put £325,000 of your tax break into a trust – or £650,000 if you combine it with a spouse or civil partner.

Money in the trust will not be included in your taxable possession when you die – although it is subject to the seven-year rule. After seven years, you could turn in another £325,000 – or £650,000 for a married couple.