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INHERITANCE TAX AND HOW TO REDUCE IT

We discussed IHT, ISA’s and pensions in another blog earlier this year, but after the 2018 Budget, it’s time to review things again.

So to recap - what exactly is inheritance tax?

Inheritance tax is the tax paid to HMRC on your assets after you die. Whoever you have appointed as Executors of your Will - along with the firm of Solicitors handling matters – must ensure this tax is paid. The famous quote by Benjamin Franklin said: the only thing certain in life are death and taxes, and inheritance tax touches on both.

And although there is no way to avoid it - if your estate is worth over £325,000 - there are ways to mitigate inheritance tax with careful planning and expert tax advice. When you die, the government assesses how much your estate is worth. This includes your savings, investments, property, cars, and even any pay-outs from life insurance policies. If the total sum of these things comes to over £325,000 (the current Nil Rate Band for Inheritance Tax) your estate may be liable for tax at a whopping 40%.

There is a little bit of good news.

If your estate includes your home, you can potentially benefit from an additional allowance of £125,000. This is rising to £150,000 in April 2019 and by a further £25,000 (to £175,000) in April 2020. This additional allowance is available, in full, to estates with a total value not exceeding £2m. Also, it is now possible to transfer any unused percentage of the above allowances from a deceased spouse or civil partner to the surviving spouse or civil partner.

Therefore, with careful planning, it is possible for an individual to benefit from a total tax free allowance on death of £1m (by 2020). And there are legitimate ways to reduce your inheritance tax bill further.  For example:

- make a gift during your lifetime. Most gifts you make to other people during your lifetime (unless they fall into the list of tax-free gifts – see examples below)) are classified as ‘potentially exempt transfers’ or PETs for short. If you survive for seven years after making the gift, no inheritance tax is due. However, if you die within this time, the gift will be added to your estate, and reassessed against other PETs you have given and your tax-free allowance.

- give away £3,000 each tax year inheritance tax.

- make as many gifts of up to £250 per person as you want during the tax year, as long as you have not used another exemption on the same person.

- give financial gifts to your spouse or civil partner.

- make normal gifts out of your income, for example Christmas or birthday presents – these gifts would usually form part of a regular pattern and you must be able to maintain your standard of living after making the gift.

- give financial gifts to charities.

- if you are a parent, give £5,000 to your child when they marry.

- and grandparents can each gift £2,500

As you can see, there is much which can be done to mitigate your inheritance tax bill. But early financial planning is crucial, and if you own a business, it is vital to seek expert tax advice. If you are uncertain if you are making the most of inheritance tax planning, speak to an expert tax advisor before proceeding further.

Cheshire Accountants Afford Bond have offices in Nantwich and Wilmslow – for further information or to make an appointment, please contact Kate.Quirk@affordbond.com or complete the Contact Us form here on our website.