How to reduce your inheritance tax bill

More than £4.8 billion was paid in inheritance tax (IHT) last year – this represents the highest amount ever. Furthermore, figures recently published by HMRC who that IHT payments have increased by 11% on average every year since 2009/2010.

Other findings from the report include the fact that whether your estate will have to pay IHT at all varies hugely depending on where you are in the country. The South East and London account for a big part of the total liable population. This region paid £2 billion, which is more than half of the total amount for the whole country. There are other parts of the country where it’s very rare for a household to pay IHT.

Are IHT receipts still increasing?

While IHT payments are continuing to go up, the speed at which it’s increasing is slowing down. Last year, the increase was almost 4%, which is much lower than the 22% increase from tax years 2014/15 to 2015/16.

The main reasons behind the increase include higher property values, growing levels of cash savings and rising stock markets. All of these reasons, combined with the freeze on the IHT allowance since April 2009 have contributed to the continual increase.

To summarise the last few years:

  • Tax year 2016/17 saw a 4% increase at £4.8 billion.
  • Tax year 2015/16 saw a 22% increase at £4.6 billion.
  • Tax year 2014/15 saw a 12% increase at £3.8 billion.
  • Tax year 2013/14 saw a 9% increase at £3.4 billion.
  • Tax year 2012/13 saw an 8% increase at £3.1 billion.

Five ways to save IHT

It can seem daunting to consider estate planning, particularly as the legislation often changes. However, with the correct planning in advance, it really is possible to reduce your IHT liability, if not eliminate it entirely.

Current legislation states that IHT is paid at 40% if the estate of the person (this encompasses money, property and possessions) is worth more than £325,000 at the time of their death. This is transferable between civil partners and spouses, so it is possible for a couple to pass on an amount of £650,000 free of IHT.

To reduce your estate and therefore its taxable value, you need to look at lifetime gifting. Usually gifts are made directly to the person you choose, but gifts can also be made to ISAs, Juniors ISAs, pensions, trusts as part of a long term financial plan.

IHT exempt gifts include:

  • Annual exemption
    You can make a gift every tax year of up to £3,000, which is the annual exemption amount. In addition, any unused exemption from the last tax year can be used. Therefore, if you use both years’ exemption, a couple can gift up to £12,000 in this manner.
  • Income gifts
    You are entitled to make regular gifts out of your income free of IHT. The gifts must be from your income post tax, be regular and leave you with enough money for your normal standard of living. This does exclude income from Life Assurance Bonds.
  • Marriage gifts
    Grandparents and parents can make a one-off gift on the marriage of their children or grandchildren. For children it can be up to £5,000 and for grandchildren £2,500. Even if you’re not a parent or grandparent, it’s still possible to gift up to £1,000 using this exemption.
  • Small gifts
    Every tax year you can gift up to £250 to as many people as you want, completely free of IHT. However, you can only do this if they haven’t received a gift using any of the other exemptions.
  • Donations to political parties or charities
    All gifts to these kinds of organisations are exempt from IHT, both during your lifetime or after you die via your Will.

New residence nil rate band

This new band applies to deaths on or after 6 April 2017. The new residence nil rate band is available in addition to the standard nil rate band (£325,000).

The residence nil rate band refers to the net value of the home. This means after any mortgage or other liabilities that are outstanding have been cleared. The band is up to a maximum of the following over the next five years:

  • £100,000 for 2017/18
  • £125,000 for 2018/19
  • £150,000 for 2019/20
  • £175,000 for 2020/21

This means that from April 2020, it’s possible for a couple (either in a civil partnership or married) to leave up to £1 million from their estate free of IHT to their descendants. To work this out, we have considered that they are using their nil rate band of £325,000 each, as well as their main home nil rate band of £175,000 each (£350,000).

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