8 tips to ensure you don’t get stung by Inheritance Tax

Over the past few years, increasing numbers of people have found themselves being caught out by Inheritance Tax (IHT). Rising property prices, sluggish thresholds, and increasing rates of business ownership have meant that IHT is no longer just a tax on the richest in society.

When establishing the value of your estate there are a number of things that are taken into account. This includes the value of any property or land you own, money held in savings, investments, all of your possessions, and shares in any business. This can quickly result in the value of an estate exceeding the nil rate band which is currently £325k per individual.

However, there are some relatively simple steps you can take to reduce your IHT liability and ensure your loved ones aren’t losing out to the tax man...

Give your assets away

Providing you live for over 7 years from the time you gift them, any assets you give away are not subject to IHT. You can also give away up to £3k each year free of IHT, and gift £5k on the event of a child’s wedding.

Use a trust

Assets placed within a trust will not form part of your estate upon death. Many people use trusts as a way of ensuring money is paid out to the right people at a particular point in time (e.g. paying grandchildren when they’re old enough to know what to do with the money).

Create a Family Investment Company

A Family Investment Company (FIC) is extremely tax-efficient option that involves transferring significant sums of cash into a company, which can then be invested to generate income for the family. It enables you to pass on significant wealth to the next generation whilst retaining control and protecting assets.

Take out life insurance

Having a life insurance policy can help cover any IHT liability upon death. It ensures your family will is not left with a hefty tax bill that may require selling the family home. It’s important to make sure the pay-out goes in into trust - otherwise it will increase the size of your estate and thus increase the amount of tax due.

Give to charity

Leaving behind at least 10% of your estate to charity reduces your IHT rate from 40% to 36%.

Make a will

Though not directly part of IHT, having a will is an imperative to ensure that your assets are distributed in line with your wishes. Without a will you risk leaving behind expensive legal costs, family disputes, and your beneficiaries may end up paying more tax.

Know the IHT threshold!

A recent survey by Canada Life found that a staggering 70% people do not know the threshold for the standard nil rate band (for the record it is £325k per individual). The new Residence Nil Rate Band also entitles you to an extra £100k when passing on the family home, rising incrementally to £175k in 2020/21.

Get professional advice

The web of rules surrounding IHT can be incredibly complex. Without the right advice you run the risk of getting entangled in legislation and leaving behind a hefty IHT bill for your loved ones to pick up.