Inheritance tax (IHT) is set at 40 percent of a person’s estate which falls above a certain threshold – usually set at £325,000. The tax is payable to HM Revenue and Customs (HMRC) upon a person’s death, but there may be actions individuals can take before they pass away to ensure costs are as low as possible. Clare Julian, wealth planner at JM Finn, offered insight into Inheritance Tax and the costs some Britons will be required to bear.
She said: “It’s understandable that people do not like Inheritance Tax and the way that it currently works.
“You’re paying tax all your life and then to get clobbered on death as well, you can see why people get so riled up about it.
“But there are lots of things people will be able to consider when it comes to lowering an Inheritance Tax bill, legitimately, and I have conversations with clients about these all the time, going through a laundry list of actions.”
Firstly, Ms Julian highlighted, it is important to consider standard, or basic, exemptions and gifting rules which are outlined by the Government.
READ MORE: IR35 changes next month – Rishi Sunak given warning on self-employed
Britons may also wish to consider more ad-hoc rules which means small amounts can be given to certain individuals as and when a person chooses, and for certain life events.
But while the small exemptions and gifts can make a difference, individuals may also wish to consider other options which are on the table.
Ms Julian said: “You have larger gifts you can give, but there is the seven year rule to bear in mind.
“This rule means there may be tax liabilities a person has to bear if you die within that period of time after giving a gift, so of course, this is important to consider.
“There have been murmurings about whether the seven year rule will be changed in the future, but of course this is just a matter of waiting to see what happens, rather than guess work.
“You should be considering how the tax works over this period if you don’t want those you leave behind to have this financial burden.”
While gifts and allowances are perhaps a more familiar way of legally avoiding an IHT bill, there may be more detailed ways of looking at the tax.
Ms Julian added: “Beyond gifts and allowances, there are various types of trusts, which might be worth looking at for certain circumstances which suit a person’s situation.
“I know people often think trusts are very complicated, but that is not necessarily always the case, and there are different types of trusts which could be appropriate for some people but not for everyone.
“Trusts can be a bit more costly, and involve more administration, so they are worth considering very carefully before you embark upon them.
“Those with a larger amount of income, you might think of gifting or loaning money to a trust and that way you can contain control over the monies, but they aren’t necessarily yours anymore.
“Some trusts will allow you to retain the right to an income for life, but giving away access to the capital, while others will allow you to just loan the investment funds and thereby you can take back the capital and only the growth is IHT free.”
With trusts presented as a way of helping to reduce an Inheritance Tax bill, looking at all of the options on the table can greatly assist Britons.
To this end, Ms Julian highlighted one final option individuals may wish to consider, and urged people to look into the matter in more detail.
She concluded: “Some people might wish to consider whole of life insurance, but this option can be quite costly.
“This is particularly the case as a person gets older, and if you have health conditions, you might not get the cover you’re looking for.
“Seeking financial advice on all these matters is always key, and I think there definitely needs to be more education for individuals in different income brackets about Inheritance Tax more widely.”