With careful planning, it is often possible to significantly reduce your estate's inheritance tax bill.
1. Gift small sums each year
You can make gifts of up to £3,000 each tax year without inheritance tax being charged. This is your annual allowance and it can be carried forward for one tax year.
2. Give away surplus income
If your net income exceeds your annual outgoings, you may be able to give away the surplus income without any negative inheritance tax consequences. This is a valuable and often overlooked exemption, which, unlike the annual allowance of £3,000, is only limited by the amount of your surplus income.
3. Create a lifetime trust
Trusts give you both control and flexibility. They are subject to a separate tax regime when created during your lifetime, and your assets will be removed from your estate for inheritance tax purposes after seven years from the creation of the trust.
4. Use your pension
Pensions remain one of the most flexible and tax-efficient vehicles for passing on wealth.
To be exempt from inheritance tax, you should ensure that your pension passes outside your estate. This means your pension fund won’t payable to your estate: the trustees of the pension scheme have discretion as to who benefits.
However, inheritance tax can arise when pensions are transferred and the pension holder dies within two years, or if a pension scheme member increases their contributions when in poor health.
5. Purchase inheritance tax-efficient investments
In addition to family-owned businesses, certain shares traded on the Alternative Investment Market (AIM) and Enterprise Investment Schemes (EIS) may be exempt from inheritance tax after you have owned them for at least two years. Whether the shares in a particular company will be exempt from inheritance tax depends on the nature of the company.
- Megan Seabourne is a partner at award-winning law firm VWV, which has offices in Clarendon Road, Watford
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