Inheritance tax: what’s the law and how can you reduce the amount you pay?

Revenues collected by HMRC from death duties continue to grow – and doubled last year to a record £5.23 billion.

In the face of this, many of us are wondering how to reduce our inheritance tax liability, especially when it often seems that the wealthiest avoid paying the tax altogether. This was the case recently, when The Duke of Westminster died and left his estate of more than eight billion pounds to his heirs, with no death duty applied.

The key to this success in inheritance tax avoidance was careful planning. Here, we summarise some of the key points regarding the tax.

Inheritance tax (IHT) is a tax on the estate (property, money and possessions) of the deceased.

Who pays the tax?

The executors of your will, such as your spouse, civil partner or other family members, are responsible for paying the tax. It is important to note that your executors usually have to settle the outstanding inheritance tax liability within six months of death to avoid paying interest to HMRC.

How much will I pay?

Every person has a nil rate band (£325,000) which means that the first £325,000 from their estate can be passed on tax free. Married couples therefore benefit from a combined nil rate band of £650,000.

Any excess above this threshold is calculated and payable at 40 per cent, although you can pay a reduced rate of 36 per cent, if you leave 10 per cent or more of the net value of your estate to charity in your will.

Is inheritance tax paid out of the estate?

The tax must be paid before probate is granted – it is therefore paid before the executors have access to the estate. This is something that many families struggle with. Once it is paid and probate has been granted, the executors can reimburse themselves from the estate.

What can I do to minimise my inheritance tax liability?

In 1986 Labour politician Roy Jenkins famously said “Inheritance tax is broadly speaking a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue.”

His point was that there are a number of ways to reduce, or eliminate altogether, your inheritance tax liability. Some, but by no means all, of these include:

Trust Matters Reversionary Settlement

This is a new and exciting financial solution we have launched, which is tailored to your circumstances and needs. It is a flexible trust that not only helps to reduce inheritance tax, but also allows you to retain the ability to access your capital.

Inheritance tax accounts

An inheritance tax account is very much like a bank account in that you have access to your money at short notice. However, after two years the funds held in the account will be inheritance tax free.

AIM ISAs

If you’ve accumulated large ISA pots, you risk leaving behind a large inheritance tax bill when you die. That’s because your ISA investments are free from capital gains tax, but they are treated as part of your taxable estate after you die.

AIM ISAs address this problem. They offer a fast and flexible solution to inheritance tax planning, allowing investors to retain control of and access to their money, while, as previously mentioned, delivering inheritance tax relief after just two years (provided the investments are still held at the time of death) and taking advantage of the tax benefits of an ISA wrapper. You can make a cash subscription using this tax year’s current ISA allowance (£20,000) and/or transfer your existing ISAs. You also have the option to withdraw money if you need it in future years.

Trust funds

Gifting assets to trust is usually a one way street i.e. you cannot have the fund back. It is free from IHT in seven years and can be held in trust as an investment in shares/unit trusts/investment bonds etc.

Why is making a will important?

Having a correctly structured will can help minimise IHT by ensuring your assets are passed to your designated beneficiaries in a tax efficient manner. The disposition of a person’s estate after death is governed primarily by the person’s will or, if no valid will exists, by the laws of intestacy.

How can Trust Matters reduce my inheritance tax liability?

We are financial advisers who specialise in inheritance tax planning. Our belief is that estate planning should be a lifetime relationship with our clients and we pride ourselves in offering a service which measures up to this belief.

Our services give our clients the peace of mind that they have their affairs in order both during their life, and for their beneficiaries after they have departed. We are always on hand for guidance and advice for you and your family.

Our philosophy is to minimise or ideally eliminate your inheritance tax liability while ensuring you retain access to and control of your funds.

We will be holding three boardroom briefings this autumn, where you can find out more about reducing the amount of inheritance tax your loved ones will pay. These exclusive events take place at our St. Alban’s office on:

• Wednesday 12th September – Octopus Investments – 11:30am

• Tuesday 18th September – Downing LLP – 11:30am

• Wednesday 19th September – Oxford Capital Partners – 11:30am

For more information or to book your place, email info@trustmatters.co.uk, confirming the date(s) you wish to attend or alternatively give us a call on 01727 737 610.

Trust Matters Group is a trading style of Trust Matters Financial Services Ltd which is authorised and regulated by the Financial Conduct Authority. This article does not constitute advice and is for information purposes only. Trust Matters is happy to offer advice for clients on these products although charges may be applied. AIM shares are generally considered to be higher risk than some other investments. Investments are subject to financial markets and can fall or rise in value. IHT benefits are lost if the product is encashed before death. Sufficient funds should be retained in non IHT protected assets to allow withdrawals to be made without loss of benefits should encashment be necessary.