More and more people in the UK are being caught by inheritance tax after the death of a loved one. Luckily, there are some ways in which this can be avoided.
The current amount of Inheritance Tax (IHT) being paid in the UK is at an all-time high, with families paying £4.7 billion of IHT in the last tax year. This is a 22% increase from the previous year and that figure is only set to continue to increase over the coming years. The current IHT threshold has been imposed since 2009, and will remain frozen at £325,000 (£650,000 for married couples) until 2021, when it is set to increase to £500,000 (and £1 million for married couples). However, if carefully planned for, inheritance tax can be made to be less of a burden for all those affected.
How is IHT calculated?
According to a recent study of 2,000 people, more than 1,800 of those were not aware of the IHT threshold, yet it affects anyone with any of the following assets:
- Cash savings
- Investments
- Properties
- Vehicles
- Life insurance pay-outs
Inheritance tax in the UK is applicable if an estate has a value over £325,000.
However, there are ways in which you can reduce, or even avoid your inheritance tax bill:
1. Give away assets
IHT is deducted if all assets are left to one of the following parties:
- A spouse or civil partner
- A charity
- A community sports club
2. Inheritance tax gifts
Inheritance tax gifts can be an effective way to pass on money to family members. Inheritance tax gifts are charged at a reduced rate over time, from the full 40%, to a total reduction. This is known as taper relief. Amounts of up to £3,000 per year can be gifted without being subjected to IHT. Any more than this annual allowance and the surplus will be liable for taper relief, as set out below.
|
Years between gift and death |
Tax paid |
|
Less than 3 |
40% |
|
3 to 4 |
32% |
|
4 to 5 |
24% |
|
5 to 6 |
16% |
|
6 to 7 |
8% |
|
7 or more |
0% |
3. Gifting a Property
A critical aspect of protecting an estate from inheritance tax is through gifting it. When passing ownership of a property on as a gift, there is no inheritance tax to pay if the exchange occurs seven or more years before death and the benefactor of the property lives elsewhere for that seven year period. However should the benefactor choose to live within the property after ownership has been passed on, in order to remain exempt from IHT, they must:
- Pay rent to the new owner at a rate that is on par with the house, or a similar rate to the properties in the area.
- Pay their share of bills for the property
4. Business Property Relief - investing in alternative assets as part of IHT planning.
By investing in alternative assets, a number of opportunities to increase the rate of IHT relief present themselves. One of these effective methods is through business property relief (BPR), with tax relief rates of up to either 50% or 100% total relief when passing on a business and its assets.
Business Property Relief (BPR) provides relief from Inheritance Tax (IHT) on the transfer of relevant business assets at a rate of 50% or 100%.
Relevant business property comprises of:
|
Type |
Rate of relief |
|
A business or an interest in a business. |
100% |
|
Unquoted shares, including shares listed on the Alternative Investment Market (AIM) |
100% |
|
Quoted shares which give control of the company |
50% |
|
Land or buildings, machinery or plant used wholly or mainly for the purposes of the business carried on by a company or partnership |
50% |
|
Land or buildings, machinery or plant available under a life interest and used in a business carried on by the beneficiary |
50% |
Qualifying EIS investments (which will typically be unquoted or listed on AIM) can be effective vehicles for relief. In order for these investments to qualify, they must have been owned for two or more years prior to death.
In addition to the IHT breaks, SEIS and EIS investments allow investors to defer capital gains tax, plus they can provide income tax relief worth as much as 30% of the first £1 million invested in tax each year.
The CoInvestor platform allows investors to invest with leading EIS fund managers without incurring significant costs. To view exclusive live investment opportunities, click here.
