Are you just dying to pay the taxman?

As the Chancellor tightens his grip on inheritance tax, simple steps can slash your liability. By Chiara Cavaglieri and Julian Knight

The brief period when both main political parties were fighting to show which of them would cut inheritance tax (IHT) the most is gone, at least for the time being. Labour now sees the Tories' plan to raise the IHT allowance to £1m as an Achilles heel, as this is essentially giving a tax break to the wealthy at a time when public finances are a mess. The only surprise about Alistair Darling's announcement in last week's pre-Budget report – that the IHT threshold will be frozen at £325,000, reneging on a promise to raise it to £350,000 – was that the Chancellor didn't go further and roll back previous reforms which had seen married couples and civil partners allowed to combine their IHT allowances.

Inheritance tax currently claims 40 per cent of assets worth more than £325,000 upon death. On an estate worth £500,000, this equates to an IHT liability of £70,000. One of the biggest criticisms is that this nil-rate threshold has failed quite spectacularly to keep up with increasing property prices.



"Since 1997, the IHT starting point has increased by only 51 per cent compared with an increase in house prices of over 130 per cent for the UK as a whole," says David Kilshaw from accountancy firm KPMG.



As a further clampdown, but only affecting a minority of taxpayers, legislation will be introduced next year to close two complex tax-avoidance schemes. "These closures have been designed specifically to attack non-standard inheritance-tax planning. They are closing down loopholes used in complex planning which involve large amounts of money," says Danny Cox, from independent financial adviser (IFA) Hargreaves Lansdown.



With the future direction of inheritance tax uncertain – with much seemingly depending on the next election – it's up to everyone with a potentially large estate to minimise the tax hit. Fortunately, there are fairly simple steps you can take to slash liability. In fact, according to research from financial advice website Unbiased.co.uk, Britons could avoid up to £2bn a year in IHT just by careful planning.



First, it's important to note that Mr Darling confirmed that he will still allow couples to combine their IHT allowances. Under changes introduced in 2007, an unused IHT allowance is transferable between married couples and civil partners. If your spouse dies, their allowance is transferred to you. So, upon your death, the nil rate band is effectively double the individual rate.



When it comes to reducing liability, gifts between husbands and wives are always free of IHT, but you can also give several thousand pounds away every year without it counting towards your estate. Annual and occasional gift allowances mean that you can give up to £3,000 in one tax year. This allowance can also be carried forward for one year only, so if you didn't use it in one year, the following year's allowance increases to £6,000. Gifts from your excess income are also not liable for IHT as long as they are considered to be part of your "normal expenditure". These gifts must be habitual, the intention being that you make gifts annually, and they must not affect your standard of living.



"This can be put to good use in the form of regular annual savings for your children. For instance you might pay £3,000 a year into individual saving accounts (ISAs) or stakeholder pensions for your children, and if you have investments accumulating income, you could arrange for that income to be paid out into plans for your children as well," says Robin Keyte, from IFA Towers of Taunton.



Small gifts of no more than £250 to any number of people in one year are also permitted, as well as wedding gifts of up to £5,000 if given to your child, £2,500 for other relatives and £1,000 for anyone else. Any donations to a charity, national body such as a museum or political party are also exempt.



For larger gifts, trusts set up for children and grandchildren play a key role in IHT planning. Money paid into a trust that can only be accessed when the beneficiary reaches 18 is exempt from tax, but only if the gift was given at least seven years before you pass away. You should also write your life-insurance policy into trust so the money goes to your beneficiaries rather than through your estate when you die. Setting up a trust can be complicated so do seek professional help from an IFA.



Knowing when to give your assets away is absolutely crucial. Donations outside the annual gift allowances are treated as potentially exempt transfers (PETs), which means that they remain within your estate if you do not survive seven years. However, the value of any gift is measured at the point of passing it on, not when you die. Therefore, if you were to give away some of your assets now, if they grow later down the line, those improvements will not be counted towards your eventual IHT liability. You're still giving away the same proportion of your estate, but at a lower value than you might hope it will reach when you die.



This can be risky, however, as once it's been given away, there's no turning back. Unless you're sure that your standard of living won't be affected by handing over your assets, it's not worth the risk simply to reduce IHT liability.



"The advantage of a PET is that the growth in its value is immediately outside of the estate. However, once gifted, this is no longer your money or asset and you cannot derive any benefit from this," says Mr Cox.



More complicated inheritance tax planning might involve Enterprise Investment Schemes (EISs), in which you can invest in fledgling, high-risk firms. These investments qualify for 20 per cent tax relief on the sum invested, up to £500,000 per year, as well as 100 per cent IHT relief after two years.



"They may not be the first most obvious solution," says Kevin Tooze, from IFA Equity Partners, "but once you have exhausted gifting, life cover and specialist trusts they may have a significant role to play in your beneficiaries' future wealth."

Plan ahead and save a fortune

- An annual IHT exemption allows you to give away £3,000 in each tax year, either as a single gift or as several gifts.

- If you do not use up this £3,000 exemption in one year you can carry it forward, for one year only.

- Smaller gifts of up to £250, to as many people as you like, are also exempt – designed to cater for birthday and Christmas presents.

- Wedding gifts of up to £5,000 from parents, £2,500 from other relatives and £1,000 from anyone else are permitted.

- Gifts to charity, political parties and bodies such as national museums and universities are exempt, no matter how large.

- Outside these allowances, gifts made more than seven years before your death are not liable for IHT.

- Ensure you use up your full IHT allowance as efficiently as possible.

- You can give away money from your surplus income without paying IHT, as long as it does not affect your standard of living and forms part of your regular spending.

- Have your life insurance policy written into trust so that it is not subject to inheritance tax.

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

Voices
There will be a chance to bid for a rare example of the SAS Diary, collated by a former member of the regiment in the aftermath of World War II but only published – in a limited run of just 5,000 – in 2011
charity appealTime is running out to secure your favourite lot as our auction closes at 2pm today
News
people
Arts and Entertainment
Bianca Miller and Katie Bulmer-Cooke are scrutinised by Lord Sugar's aide Nick Hewer on The Apprentice final
tvBut Bianca Miller has taken on board his comments over pricing
News
Elton John and David Furnish exchange marriage vows
peopleSinger posts pictures of nuptials throughout the day
PROMOTED VIDEO
Have you tried new the Independent Digital Edition apps?
News
in picturesWounded and mangy husky puppy rescued from dump
News
File: James Woods attends the 52nd New York Film Festival at Walter Reade Theater on September 27, 2014
peopleActor was tweeting in wake of NYPD police shooting
News
newsAstonishing moment a kangaroo takes down a drone
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    SThree: Trainee Recruitment Consultant - LONDON

    £20000 - £25000 per annum + OTE £40,000 + Car + Pension: SThree: SThree are a ...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE £35K: SThree: We consistently strive to be the...

    SThree: Graduate Recruitment Consultant

    £20000 - £25000 per annum + OTE £35000: SThree: SThree are a global FTSE 250 b...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE £35K - £45K: SThree: SThree Group have been we...

    Day In a Page

    Surrounded by high-rise flats is a little house filled with Lebanon’s history - clocks, rifles, frogmen’s uniforms and colonial helmets

    Clocks, rifles, swords, frogmen’s uniforms

    Surrounded by high-rise flats is a little house filled with Lebanon’s history
    Return to Gaza: Four months on, the wounds left by Israel's bombardment have not yet healed

    Four months after the bombardment, Gaza’s wounds are yet to heal

    Kim Sengupta is reunited with a man whose plight mirrors the suffering of the Palestinian people
    Gastric surgery: Is it really the answer to the UK's obesity epidemic?

    Is gastric surgery really the answer to the UK's obesity epidemic?

    Critics argue that it’s crazy to operate on healthy people just to stop them eating
    Homeless Veterans appeal: Christmas charity auction Part 2 - now LIVE

    Homeless Veterans appeal: Christmas charity auction

    Bid on original art, or trips of a lifetime to Africa or the 'Corrie' set, and help Homeless Veterans
    Pantomime rings the changes to welcome autistic theatre-goers

    Autism-friendly theatre

    Pantomime leads the pack in quest to welcome all
    The week Hollywood got scared and had to grow up a bit

    The week Hollywood got scared and had to grow up a bit

    Sony suffered a chorus of disapproval after it withdrew 'The Interview', but it's not too late for it to take a stand, says Joan Smith
    From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?

    Panto dames: before and after

    From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?
    Thirties murder mystery novel is surprise runaway Christmas hit

    Thirties murder mystery novel is surprise runaway Christmas hit

    Booksellers say readers are turning away from dark modern thrillers and back to the golden age of crime writing
    Anne-Marie Huby: 'Charities deserve the best,' says founder of JustGiving

    Anne-Marie Huby: 'Charities deserve the best'

    Ten million of us have used the JustGiving website to donate to good causes. Its co-founder says that being dynamic is as important as being kind
    The botanist who hunts for giant trees at Kew Gardens

    The man who hunts giants

    A Kew Gardens botanist has found 25 new large tree species - and he's sure there are more out there
    The 12 ways of Christmas: Spare a thought for those who will be working to keep others safe during the festive season

    The 12 ways of Christmas

    We speak to a dozen people who will be working to keep others safe, happy and healthy over the holidays
    Birdwatching men have a lot in common with their feathered friends, new study shows

    The male exhibits strange behaviour

    A new study shows that birdwatching men have a lot in common with their feathered friends...
    Diaries of Evelyn Waugh, Virginia Woolf and Noël Coward reveal how they coped with the December blues

    Famous diaries: Christmas week in history

    Noël Coward parties into the night, Alan Clark bemoans the cost of servants, Evelyn Waugh ponders his drinking…
    From noble to narky, the fall of the open letter

    From noble to narky, the fall of the open letter

    The great tradition of St Paul and Zola reached its nadir with a hungry worker's rant to Russell Brand, says DJ Taylor
    A Christmas ghost story by Alison Moore: A prodigal daughter has a breakthrough

    A Christmas ghost story by Alison Moore

    The story was published earlier this month in 'Poor Souls' Light: Seven Curious Tales'