What can you do to mitigate inheritance tax?

With soaring property prices pushing more and more estates up above the nil rate inheritance tax band of £325,000, what can you do to protect your assets and ensure that they are preserved for the people who need them most?

With the average house price in London currently standing at around £458,000, ownership of even a modest property can present a tax challenge upon death.  As London and the southeast are responsible for around half of the annual £3.1 billion of inheritance tax revenue, it makes perfect sense that many people are turning to financial advisors and portfolio managers to help make the most of their assets.

Property, savings and investments, as well as all other assets which reach the value threshold of £325,000, are subject to inheritance tax at the current rate of 40% and in the last Budget, that threshold was frozen until 2019.  The apparent never-ending rise in the value of property will therefore hit people ever harder as time passes.  According to figures from the London School of Economics, one in ten homes in the UK is valued at £1m or more which means that, potentially, one in ten families will be liable for over £140,000.

Tax planning and you

As Benjamin Franklin was reputed to have said: “in this world nothing can be said to be certain, except death and taxes.”  However, with some forethought and planning, it’s possible to lessen the tax blow for your heirs.  Mitigating inheritance tax with some fairly simple inheritance tax planning is perfectly possible.  

One of the simplest ways of achieving this is to give it away.

That’s right. Making gifts of assets or lump sums of cash is one of the easiest and most cost effective ways of avoiding inheritance tax. There are rules and conditions to follow so you can’t assume that a transfer of funds on your deathbed will be enough to qualify for exemption. You will need to survive for seven years from the date that you gift the asset; otherwise it becomes known as a ‘potentially exempt transfer’ and will still be subject to inheritance tax. 

In fact, you can give away any amount of money to your heirs while you are alive and, as long you then survive for seven years, those gifts will not be subject to inheritance tax.  A word of warning though, gifting assets that have increased in value since you acquired them (such as shares) will be subject to a capital gains tax payment on the profit of the assets so if you do plan to give them away, make sure to take professional advice before doing so. 

But, without having to live for seven years after making a gift, single people can give away up to £3,000 per year to other individuals, and that figure doubles to £6,000 for married couples.  These relatively small amounts are then deemed to be fully clear of your estate.

And upon death, up to £325,000 can be gifted free of tax and, due to changes made a few years ago, that can now be held over until the death of a second spouse at which point, up to £650,000 can be gifted free of inheritance tax.

There are of course risks attached.  Divesting yourself of your savings and investments might make sense in the short term, but without the proper planning and safeguards in place, you could easily find yourself falling short in an emergency or being unable to support yourself. Seven years is a long time, and unforeseen medical problems or other changes to your circumstances might arise, throwing your plans into disarray.

If you’re worried about the effects of inheritance tax on your nearest and dearest and want to make sure that it is they and not the Treasury who reap the maximum benefit from your hard work, why not come along for a chat with our tax advisors?  Our knowledge and understanding of financial planning is second to none and we will help you to ensure that you maximise your legacy rather than give an unnecessary gift to HMRC.

For further information please contact Clare Munro or Phil Moss.

Blog archive