13th April 2015
The Tory proposed inheritance tax (IHT) breaks are at least two years away, and indeed may never see the light of day as it all depends on what happens in May’s election.
But in the meantime there are lots of simple, practical steps investors can take to mitigate the inheritance tax liability of their beneficiaries.
Danny Cox, chartered financial planner at Hargreaves Lansdown said: “In particular, given the new inheritability of ISAs and pensions, investors should review their wills and estate plans with their solicitors, and check their beneficiary nominations are up to date on their pensions.”
Inheritance tax has lots of exemptions, which means it is in large part avoidable even for bigger estates, if you plan with care. Below Cox highlights his top five IHT saving tips
1. Pensions for estate planning
The value of personal pensions is now almost always free of any taxes including IHT on death before age 75. A pension is primarily for retirement planning but it does now make sense to consider spending non-pension assets which will be subject to IHT first in retirement.
2. Ensure pension beneficiary nominations up to date
Leave assets to the wrong person and the tax saving made on your estate could be soon outweighed by IHT on their death. For example, leaving pension assets to your spouse as cash which will be surplus to them will become taxable on their death and subject to IHT at 40%. However leave pension assets to your children and they remain IHT free, and income tax free if you die before age 75. Investors should ensure their pension beneficiary nominations are up to date as well as their Wills.
Why are beneficiary nominations important? Most pension schemes are written under a form of trust which means they are valued separately and outside the deceased’s estate, and are not subject to the provisions of a Will. The nomination gives the pension trustees the steer where to pay the death benefits although ultimately it is at their discretion.
3. Give to charity
Leave 10% of your taxable estate to registered charities and the rate of inheritance tax reduces from 40% to 36%. This does not increase the amount your beneficiaries will receive but does increase the amount charities benefit from your estate and reduces the rate of tax paid.
4. Take AIM in your ISA
Reducing the amount of your taxable estate will save inheritance tax. One way is to hold qualifying AIM shares in ISA for 2 years and these investments become IHT free under Business Property Relief rules. AIM shares are more volatile than the main market so a stronger appetite for risk is needed.
5. Use IHT exempt gift allowances
Make full use of IHT exempt gifting including the annual allowance of £3,000 a year. Perhaps the least used IHT exempt gift allowance are those made from surplus income. You can gift unlimited amounts totally free of IHT provided these gifts are from income not capital, are regular (but don’t have to be the same each year) and don’t affect your standard of living. Make these exempt gifts direct or alternatively invest in a beneficiary’s SIPP which is boosted by tax relief, or to Junior ISA/ ISA.