How to minimise your inheritance tax liabilities

Thinking about inheritance tax planning is an uncomfortable subject for many people.However, in this complex area, it is best to make preparations if you want your loved ones to benefit to the full extent possible from your estate.

It is also important to remember that after a death, family loyalties and claims can get very complicated where money is concerned, so it is better to make everything as clear-cut as possible.

Here are fourinitial ways to minimise your inheritance tax liabilities.

1. Do You Have an Inheritance Tax Liability?

The first thing to check is whether your estate will actually have any liability to pay inheritance tax. Each individual has a tax-free allowance of up to £325,000. This is known as the nil-band rate and only any amount above this will be liable for the 40% inheritance tax rate.

In addition, for married couples, transfers between them are exempt from inheritance tax. Therefore, the value of the estate that will be exempt on the second spouse’s deathwill double to £650,000, if the nil band rate was not used on the first spouse’s death.

2. Write a Will

If a person dies intestate, that is without having made a will,then the law decides what should happen to the estate. This can cause a great deal of stress for a surviving spouse and can lead to an immediate charge for inheritance tax.

If you have a partner, but you are not married to them or in a civil partnership, making a will is even more important. The estate will not pass automatically to your partner, as it would a husband or wife, therefore if for example you shared a house, family members of the deceased could have a claim to it.

Even if you aren’t married or don’t have children, but have considerable assets, it is wise to make a will. Under the rules of intestacy your estate would pass to your parents, not your brothers and sisters, and this could further complicate your parents’ inheritance tax liabilities on their own deaths.

3. Make Use of Inheritance Tax Exemptions

There are several ways you can give cash to those nearest and dearest to you whilst you are alive, which then don’t fall under your estate for inheritance tax liability.

• Your Annual Allowance: You can give away up to £3,000 per year
• Small Gift Exemption: With this you can give up to £250 to as many people as you like
• Wedding gifts: Up to £5,000 for parents, £2,500 for grandparents and £1,000 for everyone else
• Potentially Exempt Transfers: Assets or cash gifted to people worth more than the annual allowance are also exempt, as long as you survive for 7 years from the date of the gift

4. Make Use of Trusts

If you have substantial assets then it is worth considering the use of trusts. This allows you to transfer an amount of up to £325,000, double this for a married couple, into a discretionary trust. This can then be repeated every 7 years.

A trust also allows continuing control over the assets and some levels of protection. Chartered Accountants Mercer & Hole believe trusts give real flexibility on when and to whom assets should pass.

These are by no means the only ways to protect your assets and to lessen your inheritance tax liabilities, but in an area that has so many complexities it is always worth taking professional advice.Inheritance tax planning specialists Arnold Hill advise looking at all the assets and the potential planning opportunities for them, but also to not avoid looking at potential pitfalls.

This is sage advice in an area of financial planning where it is not always possible to see the final picture when plans are being made. Therefore, you need to consider different options, for example if a husband should die unexpectedly before a wife, and plan for each eventuality. It is also an area that needs constant monitoring so that if a situation changes you can amend your plans accordingly, for example by rewriting your will.