How to avoid inheritance tax

Inheritance tax is a tax paid on death on assets. There are some exceptions, but if the tax is applied it is normally at a rate of 40%. Inheritance tax is often referred to as IHT for short. But there are methods that can be used to avoid inheritance tax.

Inheritance tax – key points:

  • The first £325,000 of someone’s estate (assets on death) do not count. A legal spouse can “inherit” their deceased spouse’s £325,000 allowance. The £325,000 is referred to as the nil rate band (NRB). Effectively a couple have a combined NRB of £650,000.
  • In addition to the NRB there is a residence nil rate band of £175,000. This means that if you leave a home to loved ones you can leave up to £500,000 without inheritance tax to pay.
  • There is no IHT to pay on assets of any value left to a legal spouse.
  • For most people their house is their main asset and giving it away but continuing to live there does not avoid inheritance tax – in such an instance a house would become a “gift with reservations”.

How to avoid inheritance tax

It is possible to just give away assets whilst you are alive, and this can avoid inheritance tax. You would need to live seven years for it to escape IHT or it can become chargeable. (This would be at a lower rate than 40% if you survived the first three years).

For most people their house is their main asset and giving it away but continuing to live there does not avoid inheritance tax – in such an instance a house would become a “gift with reservations” and would be subject to IHT even if you survived seven years.

Make use of  allowances – Legislation allows you to gift money which would not count for IHT purposes. There is a annual exemption of £3,000 each year, and gifts on account of marriage.  It is also possible to make gifts that would be exempt from IHT provided it is out “normal expenditure”. The problem is these amounts tend to be relatively small in relation to many peoples assets.

Make use of trusts –  Using a trust can take money out of the estate and sometimes stop the value of your estate increasing. A number of insurance companies offer trusts for their investments. Popular ones in the past have been a Discounted Gift Trust or Loan Trust. They have their place, but they have the complexity of a trust wrapper, and for some you would need to live seven years for it to work fully.

Invest in IHT efficient investments –  One exemption are investments that qualify under Business Property Relief (BPR for short). Business Property Relief has be around since the 1970s, and effectively means that by investing in one you become a business owner, which means that there is no inheritance tax to pay after two years of ownership.

Business Property Relief Investments

Putting money in an investment that qualifies for BPR is one of the fastest ways to prevent money being charged against IHT on death, as it only has  to be held for two years. It was introduced to allow family owned businesses to be passed down the generations without incurring IHT.

But most people who have an IHT issue will not want to become an active business owner. There are a number of companies who offer a solution to this through an “inheritance tax service”. Effectively you buy shares in a trading company (and it cannot be on the main stockmarkets).

Inheritance tax service investments

These invest in range of companies that will work in trade in more secure and predictable environments. The aim is not to get stellar returns but to preserve capital and get a modest return.

The company itself will often trade in a number of sectors such as:

  • UK forestry
  • UK farming
  • hotel ownership and management
  • property development
  • renewable energy
  • secured finance
  • care homes

One of the largest such  trading companies has assets in excess of £2.8 billion (as at 2022), and is completely owned by investors using  an Inheritance tax service.

If you want to find out more then contact us online or phone on 01793 686393, or visit our specialist tax avoiding website

If you want to discuss any of the issues or  want advice, have a question, or just want to have a chat about it with a UK Qualified Independent Financial Adviser, then  phone now on 01793 686393 or contact us online