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, 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

Arts and Entertainment
The cast of The Big Bang Theory in a still from the show
tvBig Bang Theory filming delayed by contract dispute over actors' pay
England celebrate a wicket for Moeen Ali
sportMoeen Ali stars with five wickets as Cook's men level India series
Morrissey pictured in 2013
Have you tried new the Independent Digital Edition apps?
peopleGuitarist, who played with Aerosmith, Lou Reed and Alice Cooper among others, was 71
Robyn Lawley
i100  ... he was into holy war way before it was on trend
Arts and Entertainment
High-flyer: Chris Pratt in 'Guardians of the Galaxy'
filmThe film is surprisingly witty, but could do with taking itself more seriously, says Geoffrey Macnab
Life and Style
food + drinkVegetarians enjoy food as much as anyone else, writes Susan Elkin
Life and Style
lifeDon't get caught up on climaxing
Life and Style
Arts and Entertainment
Harry Potter (Daniel Radcliffe), Hermione Granger (Emma Watson) and Ron Weasley (Rupert Grint)
newsBloomsbury unveils new covers for JK Rowling's wizarding series
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    1st Line Support Technician / Application Support

    £20000 - £24000 per annum: Harrington Starr: A leading provider of web based m...

    Team Secretary - (Client Development/Sales Team) - Wimbledon

    £28000 - £32000 per annum: Ashdown Group: Secretary (Sales Team Support) - Mat...

    Accountant / Assistant Management Accountant

    Competitive (DOE): Guru Careers: We are looking for an Assistant Management Ac...

    Senior Investment Accounting Change Manager

    £600 - £700 per day + competitive: Orgtel: Senior Investment Accounting Change...

    Day In a Page

    Save the tiger: The day America’s love of backyard tigers led to a horrific bloodbath

    The day America’s love of backyard tigers led to a horrific bloodbath

    With only six per cent of the US population of these amazing big cats held in zoos, the Zanesville incident in 2011 was inevitable
    Samuel Beckett's biographer reveals secrets of the writer's time as a French Resistance spy

    How Samuel Beckett became a French Resistance spy

    As this year's Samuel Beckett festival opens in Enniskillen, James Knowlson, recalls how the Irish writer risked his life for liberty and narrowly escaped capture by the Gestapo
    We will remember them: relatives still honour those who fought in the Great War

    We will remember them

    Relatives still honour those who fought in the Great War
    Star Wars Episode VII is being shot on film - and now Kodak is launching a last-ditch bid to keep celluloid alive

    Kodak's last-ditch bid to keep celluloid alive

    Director J J Abrams and a few digital refuseniks shoot movies on film. Simon Usborne wonders what the fuss is about
    Once stilted and melodramatic, Hollywood is giving acting in video games a makeover

    Acting in video games gets a makeover

    David Crookes meets two of the genre's most popular voices
    Could our smartphones soon be diagnosing diseases via Health Kit and Google Fit?

    Could smartphones soon be diagnosing diseases?

    Health Kit and Google Fit have been described as "the beginning of a health revolution"
    Ryanair has turned on the 'charm offensive' but can we learn to love the cut-price carrier again?

    Can we learn to love Ryanair again?

    Four recent travellers give their verdicts on the carrier's improved customer service
    Billionaire founder of Spanx launches range of jeans that offers

    Spanx launches range of jeans

    The jeans come in two styles, multiple cuts and three washes and will go on sale in the UK in October
    10 best over-ear headphones

    Aural pleasure: 10 best over-ear headphones

    Listen to your favourite tracks with this selection, offering everything from lambskin earmuffs to stainless steel
    Commonwealth Games 2014: David Millar ready to serve up gold for his beloved Scotland in the end

    Commonwealth Games

    David Millar ready to serve up gold for his beloved Scotland in the end
    UCI Mountain Bike World Cup 2014: Downhill all the way to the top for the Atherton siblings

    UCI Mountain Bike World Cup

    Downhill all the way to the top for the Atherton siblings
    Save the tiger: The animals bred for bones on China’s tiger farms

    The animals bred for bones on China’s tiger farms

    The big cats kept in captivity to perform for paying audiences and then, when dead, their bodies used to fortify wine
    A former custard factory, a Midlands bog and a Leeds cemetery all included in top 50 hidden spots in the UK

    A former custard factory, a Midlands bog and a Leeds cemetery

    Introducing the top 50 hidden spots in Britain
    Ebola epidemic: Plagued by fear

    Ebola epidemic: Plagued by fear

    How a disease that has claimed fewer than 2,000 victims in its history has earned a place in the darkest corner of the public's imagination
    Chris Pratt: From 'Parks and Recreation' to 'Guardians of the Galaxy'

    From 'Parks and Recreation' to 'Guardians of the Galaxy'

    He was homeless in Hawaii when he got his big break. Now the comic actor Chris Pratt is Hollywood's new favourite action star