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Ways to mitigate inheritance tax
Some IHT mitigation strategies are simple whilst others are more complex. The most effective and appropriate strategies deployed by you, to avoid HMRC becoming one of the largest beneficiaries of your estate, will depend on your individual circumstances.
Outlined below are a few smart strategies that should be considered when looking at your overall situation.
Do you have a valid Will and have you considered a Lasting Power of Attorney? Whilst arguably the most pivotal component to any considered IHT plan, making a valid Will and considering a Lasting Power of Attorney is unfortunately often delayed or overlooked altogether.
Dying intestate (without a valid Will) can unwind the best intentions regarding IHT planning; so a valid, up-to-date and professionally drafted Will should form the foundation of any IHT strategy.
Should you make a gift?
Gifting assets, such as cash, securities or property, during one’s lifetime is one of the simplest methods of reducing IHT liabilities.
An estate can pay IHT at a reduced rate of 36% on some assets if you leave 10% or more of the net value of your estate to a registered charity via your Will. Additionally, individuals can give away £3,000 worth of gifts each tax year without them being added to the value of your estate. If you haven’t used your annual exemption from last tax year, you can carry it forward and use it this year.
Other exempt gifts include wedding or civil ceremony gifts, normal gifts out of surplus income, payments to help with another person’s living costs, and/or gifts to charities or political parties.
Most other gifts made during your lifetime are ‘potentially exempt transfer’, meaning that they are free of any IHT liability if you survive seven (7) years after making the gift. Gifts made three (3) to seven (7) years before death are taxed on a sliding scale known as taper relief.
• IHT is payable at a at rate of 40% on estate assets in excess of £325,000 (known as the nil rate band) for a single person or £650,000 for a couple
• IHT nil rate band to remain frozen at £325,000 until April 2021
• HMRC IHT receipts reached £4.7 billion in 2015/16: 22% higher than in 2014/15
• The number of families affected by IHT is at a 35 year high
• IHT is due six months after the end of the month in which the deceased died. In certain cases it is possible to pay by annual instalments over 10 years