What are the Key Strategies for Reducing Inheritance Tax?

Inheritance Tax (IHT) can be a significant concern for individuals planning their estates, as it is a tax imposed on the estate before assets are distributed to heirs. Previously Mark Stubberfield, Head of our Wills, Trust and Probate department addressed some frequently asked questions about IHT and your Property.

We have sat down with Mark once again to answer additional questions regarding IHT and your personal finances.

Q: How can you utilise annual allowances to reduce your inheritance tax bill?

Everyone has annual allowances that can be used to gift money without it being subject to inheritance tax calculations. Gifts typically remain part of an estate for seven years, but there are set allowances each tax year that are free from tax. These include:

Annual Gift Allowance: £3,000 per year

Wedding Gifts: Different amounts based on the relationship to the recipient

Regular Gifts from Excess Income: Gifts made regularly from surplus income

Small Gift Exemptions: Gifts under £250

Q: How can you claim back inheritance tax on decreased asset values?

If the value of assets like property or investments drops after the date of death, it’s possible to claim back the tax on the loss. For instance, if you pay inheritance tax on an investment valued at £250,000 at the date of death but it sells for £220,000, you can claim back the tax on the £30,000 loss, potentially recovering £12,000 in tax.

Time limits apply for these claims:

Shares must be sold within 12 months from the date of death

Property must be sold within four years from the death of death

Claims for losses on shares can be made up to four years post-death, and for land, up to seven years.

Q: How can misusing allowances lead to higher inheritance tax?

One of the most common mistakes is not using all available allowances when applying for Probate. For example, when valuing shares, ensure you convert pence to pounds correctly. Mis-evaluation can lead to significant errors in tax calculations.

Q: How can jointly owned properties affect your inheritance tax?

If you own property jointly with a friend or certain family members, you might be eligible for a reduction in the probate value, typically around 10%. This reflects the challenge of selling a share of an asset, like half a house, which is not easily marketable.

Q: How can gift rules increase your inheritance tax?

Gifts usually fall outside the estate after seven years unless the donor retains a benefit. This is known as a gift with reservation of benefit. For instance, gifting a house but continuing to live there rent-free means the house remains part of the estate, regardless of the seven-year rule.

Q: How can you ensure your children/grandchildren inherit your home without excessive tax?

There is a tax-free allowance if you leave your main residence to direct descendants, including grandchildren. Married couples or civil partners can have an additional £350,000 allowance, resulting up to £140,000 in tax savings.

To claim this allowance, your estate must be left directly to the grandchildren at age 18. If you stipulate an age over 18, such as 21 or 25, you cannot claim the allowance. Additionally placing the estate into a Trust negates this allowance. The allowance reduces if your estate’s value exceeds £2,000,000.

Q: What are the rules on passing pension savings tax-free?

Pension savings can be beneficial for IHT purposes. You can nominate beneficiaries for any lump sum payment, which can then pass outside your estate and avoid IHT. This is particularly beneficial if passing to children or grandchildren, potentially saving 40% of the pension’s value in tax.

Another option is writing the pension policy into a Trust. This is useful if you want to delay when young of financially immature beneficiaries can access the funds. Trustees can manage the funds for the beneficiaries’ benefit, keeping them out of the beneficiaries’ direct control.

Navigating IHT can be complex but understanding these key areas can help reduce your tax burden and ensure your assets are distributed according to your wishes.

For more information on the above, please contact Mark Stubberfield by clicking the ‘contact us’ button or call Mark on 01732 758545 at our Brighton Office.