Inheritance Tax Planning

Nationwide Inheritance Tax Planning


Chancellor Philip Hammond has written to the Office of Tax Simplification (OTS) to request a review of inheritance tax (IHT) with a view to simplifying the current regime.

In a letter, dated 19 January, Hammond said: “I am writing to acknowledge the OTS’s recent interest in the IHT regime. IHT, and the system within which it operates, is particularly complex, and I would like to request that the OTS carry out a review of the IHT regime.

“I would be most interested to hear any proposals you may have for simplification, to ensure that the system is fit for purpose and makes the experience of those who interact with it as smooth as possible.”

Hammond said the review should include a focus on the technical and administrative issues within IHT, such as the process of submitting returns and paying any tax due, as well as practical issues around routine estate planning and disclosure.

Considering how current gift rules interact with the wider IHT system, and whether the current framework caused distortions to taxpayers’ decisions surrounding transfers, investments and other relevant transactions, was another area Hammond asked to be included in the review.

“I look forward to agreeing the detail of the terms of reference in the coming weeks,” he added.

‘Well Overdue’

Irwin Mitchell Private Wealth partner Anthony Nixon said Hammond’s interest in simplifying IHT was “well overdue”.

“‘Improving the customer journey’ is a major priority at HM Revenue & Customs (HMRC), and so as a result changes are afoot,” he said.

Nixon said he hoped the OTS review would include:

  • “Reform – perhaps complete abolition – of the ridiculously complex new IHT allowance linked to the value of one’s home, known as the Residence Nil Rate Band (RNRB). Put plainly, it discriminates against those who do not own their own home, those who do not have children, and those who not married. The current £325,000 allowance, which has been fixed since 2010, could then be raised for everyone.”
  • “A fresh look at the IHT rules for trusts, where the opportunity for reform was missed by HMRC in a recent review. It should be easier for those worried about their own improvidence to be able to create a trust for their own benefit, without tax penalties.”
  • “Simplification of the IHT reliefs for businesses and, particularly, farmers, whose families usually have to claim both agricultural and business reliefs, rather than making a single claim.”

What exactly is Inheritance Tax?

Inheritance Tax principally is tax paid as a result of your death on all your estate: house, savings, car, antiques, household items, life policies, cash lump sums, inheritance from parents etc. The first £325,000 is tax-free. Everything over £325,000 is taxed at a rate of 40%.

So, on a total estate of say £400,000, there would be a tax bill to be paid of over £30,000 . This is money that you will not be able to leave to anyone except the taxman! What could your children do with this?.

The very bottom line is whether you would rather give your hard earned money to the taxman or to your children/grandchildren.

How can you avoid Inheritance Tax?

There are a number of ways to avoid Inheritance Tax. Here are some of the most popular:

Small gifts of money can be given away annually to reduce Inheritance Tax (up to £3,000 per person).
A Discretionary Will Trust uses your Nil Rate Band (currently £325,000). This can take out up to 50% of the value of your house. This can be used for either spouse or partners but sadly not for singles or widows/ers. If your partner has died in the last 2 years, you can do a Deed of Variation and make/change a Will to make it tax efficient (as long as all the beneficiaries agree).
Married couples and civil partners have a special concession. They can also use the left over allowance of their deceased partner effectively doubling the Nil Rate Band from the current £325,000 to £650,000.
For larger estates, say over £650,000, there are a number of new ways to save even more IHT than ever before. We can ensure that your money goes to your children and not to the taxman.
An Inter Spousal Transfer: married couples can in time save up to 50% of the value of your property by effecting a Deed of Gift of the debt created, to the children.
Investment Trust: Gift up to £325,000 in funds to a special type of Relevant Property Trust which then incurs an income producing investment e.g. unit trusts. The income can go to the person who made the gift. After 7 years, the gift can be excluded from IHT.
Lifetime Trust: Gift £325,000 to a Trust every 7 years and repeat every 7 years. Each such gift is outside of the estate after 7 years.
Pilot Trust: There are a number of ways in which trusts can be set up in a persons life time to save Inheritance Tax for future generations.
Sharing Ownership: You can gift a portion of your home to an “occupant” such as a child, niece, nephew etc. This could eventually fall outside the calculation for IHT.
Life Insurance to pay the Inheritance Tax bill when you die. This covers the IHT liability but unfortunately can be quite expensive and ideally should be used only if the other IHT saving methods do not “mop up” all the tax payable.

Is it legal?

It certainly is! Our experts have a number of legal ways to avoid a huge amount of Inheritance Tax.

We would welcome the opportunity to show you how to save this major tax bill (which would also dramatically affect your children).

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