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10 ways to cut inheritance tax

Paul Lewis / 05 August 2019

People fear inheritance tax, but there is no need. Follow these ten tips to cut inheritance tax, and also find out what you shouldn't do

Model house in a nest in a tree
People can be scared that they'll lose a lot to inheritance tax, but it can be cut – find out how

1 Do nothing

Latest figures show that the relatives of 94% of people who die do not pay Inheritance Tax (IHT). Out of 591,000 deaths in 2018/19 just 22,000 estates paid it – that is just one in 26. So it probably won’t happen to you. You can leave £325,000 without any tax being due. If you own your home and leave it to a child or grandchild that amount is boosted by £150,000 this year and from April 2020 the two together will be £500,000. If the person who dies is widowed or a bereaved civil partner those amounts are usually doubled – £650,000 and another £350,000 for the family home from April 2020. The extra tax-free amount for your home is less if your total estate is more than £2 million. Anything above these limits is taxed at 40%.

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2 Marry the one you love

If you fear you will be one of those who does have to worry and you are in a relationship, then marry your beloved or become civil partners. Marrying the one you love is surely the nicest bit of tax planning you can do! A married or civil partnered person can leave everything to their spouse completely free of IHT. The comedian Ken Dodd married his partner of 40 years two days before his death in March 2018, saving her nearly £11m in tax. Civil partnerships will be open to all couples – same or opposite sex – in England and Wales from the end of this year.

3 Live for seven years

Living longer can also be excellent tax planning. If you give money or property away and then live seven years it is exempt from IHT. So why not distribute your riches to those you love before you die? Of course, no one knows when that day will come. If you make very large gifts that total more than £325,000, but die within seven years, the tax has to be paid by the recipients. But if you live at least three years after the gift is made the tax can be reduced.

However – beware the GROB! If you give things away but still enjoy them then the rule called Gifts with Reservation of Benefit (GROB) will apply and the things you gave away will count as part of your estate. So if you give your home away but still live in it or give your daughter your Porsche but it sits on your drive and you use it, then the value will be counted in your estate even though technically someone else owns it.

4 Give money away anyway

Even if you don’t live seven years, you can give away a total of £3,000 each tax year without it counting when IHT is worked out. If you give nothing away in one tax year then you can bring £3,000 forward from that year and give away £6,000 the next. Note that £3,000 is the maximum total gifts you can make, for example three gifts of £1,000. You can give up to £5,000 to one of your children as a wedding gift – and up to £2,500 to a grandchild (or great-grandchild) or £1,000 to anyone else. You can combine these exemptions – give £5,000 to one of your children when they marry and give up to £3,000 as well. These amounts are personal, so if you are one of a couple you can each give these amounts. Never give away money you may need yourself.

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5 Make small gifts

In addition to these bigger gifts, you can give away up to £250 to any number of people (but not those who got the big gifts). If your income is more than you need then you can make regular payments to someone from the surplus as long as your standard of living is not reduced. You can also give any amount for the maintenance of your children (but not grandchildren) when they are in full time education, including university. You can also pay maintenance to an ex-spouse or to a relative who is financially dependent on you without it counting as part of your estate. It will help your executors if you keep notes of any gifts and what exemption you think applies, though there is no obligation on you to do so.

6 Fund your pension

Money in a pension fund – such as a SIPP or personal pension – is outside IHT rules. Tell the firm that administers it who you want to get it and on your death it will be transferred to them. If you die under the age of 75 the recipients can do what they want with it and pay no tax. Over the age of 75 they will normally put it into a pension scheme of their own, again tax-free. But if they take it out then it will be added to their income and taxed.

If you want to boost your fund to help with IHT, remember there are strict annual and lifetime limits to how much you can pay in and you cannot put any money into a pension after the age of 75. If HMRC suspects you have been making big transfers just before you die to avoid IHT it may challenge them.

7 Take out life insurance

If you have a life insurance policy then you should make sure it pays out into a trust rather than into your estate. Your insurer should be able to advise on this, though some are better than others. You also need to write a letter of wishes to the firm stating who you want to get the money. If the job is done properly then on your death your heirs will be paid from the trust free of IHT.

8 Buy land

Buying land can avoid IHT under what is called Agricultural Property Relief. The land must be used for agriculture – producing crops or rearing animals. It can include buildings or dwellings that are in use. You must have bought it normally at least two years and sometimes seven years before you die. The value will be free of IHT, though in some circumstances it may only be 50% tax free.

The rules are complex and you should always consult a solicitor who specialises in such sales. It is worth doing only if you are sure your heirs will pay IHT and you are wealthy enough to pay for good advice and buy the right sort of land – and look after it.

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9 Leave money to charity

Anything you leave to a charity is exempt from IHT. That also applies to gifts to universities, national museums, art galleries or libraries, and major political parties. The gift reduces IHT because there is less to be taxed. If you leave at least 10% of your estate to charity then the rate of tax on the rest of your estate is reduced from 40% to 36%.

However, your heirs will be better off in almost every case if you leave them the money rather than a charity. It is better to get 60% of something than 100% of nothing.

10 Equity release

Sometimes people are encouraged to take out equity release just to reduce their IHT. That is bad advice. With equity release you borrow an amount of money secured on your home. No interest is paid while you are alive (although some equity release products allow you to pay the interest monthly), and on your death the whole amount is repaid from your estate. That means less IHT will be due because the estate will be a lot smaller.

Equity release might be a very good idea to give you more money from the value of your house while you are alive. But if you do not need it then it is not a sensible way to reduce your IHT. There are fees and interest to pay and your heirs will always inherit more if you do not take it out.

Dark schemes

Those are my ten ways to reduce IHT. They are all legal and fully in line with what the Government intends. And some are fun! But there are dark schemes that sneak around the edges of the law. They will cost you good money while you are alive. It is only after you die that your heirs will discover that the scheme does not work. Why, they will ask, did Mum or Dad not leave the money they gave to those rogues to us instead!

In 2018 a firm called Universal Wealth Preservation went into administration. It charged thousands of people hefty fees to put their home into a trust. Many added cash to that too. Their homes should be safe, though a legal process is now needed to take Universal Wealth directors off the list of trustees and that can be especially difficult after death. People who put cash into the trust fear it has been lost. The police are involved. Universal Wealth Preservation sold its scheme to older people at seminars in smart hotels. Never buy any financial product promoted at such meetings.

This article is for information only. Neither Paul Lewis nor Saga Magazine accepts any liability for any use made of it. Always get professional advice. 

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The opinions expressed are those of the author and are not held by Saga unless specifically stated. The material is for general information only and does not constitute investment, tax, legal, medical or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.

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