Inheritance Tax Planning

Inheritance Tax Planning

The Government intends to freeze the Inheritance Tax (IHT) threshold of £325,000 until 5th April 2018. As part of a person’s on-going Inheritance Tax planning, full use should be made of available exemptions. The exemptions are relatively small, but, over time the effect can be substantial.

  • Annual Exemption – An amount of up to £3,000 can be given away each tax year and, if unused in a year, that amount can be carried forward for one year and utilised in that later year.
  • Small Gifts Exemption – You can give up to £250 to as many people as you wish each tax year.
  • Gifts out of Income – If your income regularly exceeds your expenditure, you can give away the excess every year. You do need to record the intention to make these gifts and you do need records of your income and expenditure.
  • Lifetime Giving – A person may also consider making lifetime gifts in excess of the above exemptions. A person must survive such a gift by seven years for it to fall out of their estates entirely, and the donor must not benefit from the assets once they are gifted. Gifts might be absolute to family members or they could be gifts into trust. Trusts can be very beneficial but specialist advice is needed.
  • A very effective way of providing for an IHT liability is to effect a life policy, often on a joint life basis with both spouses, where the sum assured is payable outside the estate on death (second death in the case of a joint policy) when the tax would become due. This strategy does not reduce the tax liability but provides for it’s payment with the cost of such being the monthly or annual premium paid for the life policy.
  • IHT Efficient Investments – Another alternative can be to place funds into IHT efficient investments, as such investments can pass free of Inheritance Tax after they have been owned for two years. Appropriate investment advice would be needed when considering such planning.