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Positive steps to mitigate Inheritance tax

Our last two columns have focused around your property and Inheritance Tax given the surge in house prices.

mitigating inheritance tax
A proactive approach to inheritance tax will save you in the long run.

There are many other methods of mitigating inheritance tax so here are tips to some of them so as to leave your money to your loved ones rather than the ‘beloved’ tax man.

If you have a life insurance policy, it may pay out on death into your estate, which simply increases your estate for Inheritance Tax. That policy could be written into trust to take it outside your estate and over to your beneficiaries with a simple trust document.

How inheritance tax affects you

If you have a deceased partner, consider utilising any nil rate band or any residence nil rate band they didn’t use.

Look at your ISA’ and consider moving them to an AIM ISA to utilise business property relief which is currently a 100% relief on Inheritance Tax charged on assets that qualify. Make sure that you understand and are comfortable with the risks associated with this type of investment first though.

Whilst Business Property Relief is currently 100%, that can change in later Governments so remember it is not set in stone. Also, many business owners currently enjoying the comfort of knowing they might have Business Property Relief on their businesses will of course lose that when they sell the business, with all assets from the sale moving into their estate. Not all business assets have 100% relief and your adviser can explain those to you.

Use the cash gifts you can, and also gifts out of normal expenditure that you are allowed to make. They will be outside of your estate, and you get to see the smile!

Be sure to make a Will. Naturally, this will ensure your estate is passed to those that should receive it, but it will also facilitate your beneficiaries being able to alter your will after your death to navigate any changes in Inheritance Tax. This is called a Deed of Variation and is available within two years of death.

Whilst you are with your solicitor, you should also consider lasting Powers Of Attorney, which will allow people you trust to make decisions about your health and welfare and financial affairs if you become incapacitated.

There are also methods of gifting capital into trust now whilst you are still alive. Do not shy away, they are really quite normal and popular. A trust allows you to entrust your money to trustees (you choose them). They become the legal owners and manage it for the beneficiaries you choose.

Putting trust in trusts

Some trusts allow you to allocate the value of the trust on death to the beneficiaries but retain an interest in it via an income. One of these, for example, is a discounted gift trust, which allows you to set up an income when you set up the trust. The income returns to you over the term of your life and the remaining capital and its growth passes to the beneficiaries free of Inheritance Tax if you have lived longer than seven years.

There is an added benefit in that the gift at the time is immediately discounted by your right to the return of capital, reducing your estate immediately. So if you are younger and healthy and were expected to live for a reasonable time, your initial gift is discounted by that amount. This is estimated at the time by the trust provider and is only agreed on death with the revenue.

All future growth on the funds you invest into are also free of Inheritance Tax.

A loan trust is another trust but with this scheme you appoint trustees and make a loan to them and then are allowed to withdraw that later as loan repayments. Its key benefit is that the growth on the money invested is outside the estate.

There are other trusts, but space prohibits coverage of these and your Independent Financial Adviser, accountant or solicitor will advise on those.

Retaining flexibility

One final option is to retain total flexibility and simply insure against the tax payable. If the tax expected was, say £200,000, you insure yourself or your partner on second death for this amount, and write that into a trust for the benefit of your beneficiaries who receive the capital, pay the tax, and carry on with your estate as it is.

If you have an Inheritance Tax query, you’d like more information on call 01872 222422, email [email protected] or visit wwfp.net.

Peter writes every week for 50connect and cover everything from investment to inheritance tax, for more content like this visit our Finance channel.

Last modified: August 6, 2021

Written by 7:02 pm Tax