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Thoughts on Inheritance Tax and how to reduce it

Tax is a thorny subject during our working lives and is inescapable in retirement, at least when it comes to income tax.

However, we can make both small and large strides to reduce the amount of inheritance tax (IHT) our families pay.

What are some of the small things you can do?

Wedding or civil partnership gifts to children and grandchildren are IHT-friendly within certain limits - up to £5,000 for each child and £2,500 for each grandchild. There’s also a small gifts exemption, whereby you can give up to £250 to as many individuals as you like, though pay more than the £250 and the exemption is lost completely!

The other exemption that works well is for regular gifts out of surplus income. Such gifts must be out of your net income and not diminish your lifestyle. In essence, if you have to top up from capital then they won't qualify. If it is possible to demonstrate a definite commitment to making regular gifts, then the exemption may be allowed even where the donor only made one payment before their death.

The other exemption that often gets forgotten is the annual gift exemption. Up to £3,000 can be given away in a tax year, and if the previous year's exemption was unused then £6,000 can be given away (or £12,000 if your spouse is in the same position).

It should be noted that in all of these matters it is important to keep good records of the amounts and timings of gifts as you won’t be around to talk to the taxman!

What are some of the larger things you can do?

One absolute essential is to make sure you have an up-to-date will, as dying intestate can result in not only unnecessary IHT but also the wrong people inheriting.

The other thing to remember is that a married couple have two individual nil-rate bands and if one band is not fully used it can be used by the last survivor - so in effect IHT bites at £650,000.

In practice, the two most common ways for people to reduce IHT substantially is by creating trusts or to give capital away absolutely. If you create a discretionary trust then the most you can settle before instigating a “lifetime” charge to IHT is your nil rate band of £325,000. So again a couple could settle a trust for grandchildren, say, with £650,000 and can do this every seven years without an immediate tax charge.

The second method of IHT mitigation mentioned is to gift capital absolutely to designated individuals. This is known as a Potentially Exempt Transfer (PET) and has no monetary limit. The only criterion is that you survive for seven years for the PET to be outside of your estate completely for IHT. There are some specific rules that can still make the gift tax efficient, even if you do not fully survive the seven year period.

It is important that professional advice is taken when considering IHT planning. At one level it is important to make sure that the right tax structuring is done. At another level it is also important to make sure that you can afford it.


FF&P Wealth Planning and Fleming Family & Partners Wealth Planning are trading names of Asquith Financial Limited and FF&P Wealth Planning LLP.

FF&P Wealth Planning LLP is a company registered in the UK, company number OC312516. The company is an associate company of Fleming Family & Partners Limited and an appointed representative of Asquith Financial Limited which is authorised and regulated by the Financial Services Authority.

The information provided is for your information and does not constitute advice or a personal recommendation. Whilst every effort is made to ensure the accuracy of information provided, FF&P Wealth Planning makes no representation or warranties about the accuracy of such information.

The information is provided for residents of the UK only.

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