Inheritance Tax Rules that Could Save You Money

With the rules on paying Inheritance Tax (IHT) changing year on year, it is important to be aware of the affects they may have on your estate when you die.

If you want to be able to pass as much wealth as possible onto your loved ones, take note of the strategies below.

Make Use of your Pension

Funds inside your pension will not be liable to the same 40% IHT that funds would be if they were anywhere else in your estate. If you are over 75 when you die, which is most likely to be the case, your beneficiaries will pay Income Tax at their personal rate when they take the money out. This could mean a saving of up to 20% on IHT.  Furthermore, if you die before 75, any beneficiaries can take your pension as a lump sum completely tax free. *

Giving Wealth to Family

If you have family you would like to be able to gift money to, this strategy may be one of the easiest for you to use. Each tax year, you are allowed to give up to £3,000 which will not be liable to IHT. 

This money could be invested on behalf of a child or grandchild in a Junior ISA, allowing them to begin saving for university fees or a house purchase from an early age. Junior ISA savings are limited to £4,260 for the current tax year, this allowance is lost if not used.

Don’t forget, you can also use up any left-over gifting allowance from the previous tax year, meaning that as a couple you could remove £12,000 from your estate in one year, and save up to £4,800 in IHT.

Gifting from Income

If you have a large amount of surplus income, you are allowed to gift it taking into consideration the ‘normal expenditure out of income’ rule. The only limit to these gifts is the amount of resources you have. Essentially, if you are able to gift away income without affecting your standard of living, those gifts are exempt from IHT as soon as they are made.

You could make use of this to pay school or university fees as setting up a standing order supports your intent to make gifts regularly and therefore helps to satisfy the circumstances needed for IHT exemption. Always make sure to record who you made the gits to, the date, and the value; just in case any checks are made by HMRC. 

Review your Will

The person you leave your money to will affect whether IHT is payable or not. If left to a child, IHT will usually be paid at 40% on anything over £325,000. However, if passed to a spouse or registered civil partner it will not attract IHT. This is why couples often leave everything to each other.

You can still look to ensure that your nil-rate band legacy is passed on to your children by using a trust, with the rest of your estate going to a spouse. 

Trusts

By moving assets into a trust, you begin a 7-year window which gradually removes them from your estate, eventually making them exempt from IHT. However, the rules around trusts can be complicated, so it is best to get advice from a professional before either setting up a trust or writing one into your Will.**

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief generally depends on individual circumstances.

* If you make a pension contribution while you are in serious ill health and don’t survive to take your retirement benefits, there may be a tax charge to pay, as you may be deemed to have deliberately tried to avoid IHT. To reduce the possibility of a disagreement with HMRC, it is sensible to seek professional financial advice.

** Will writing involves the referral to a service that is separate and distinct to those offered by St. James’s Place. Wills and Trusts are not regulated by the Financial Conduct Authority.

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