From gifts to wills – you may be able to slash inheritance tax bill

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Inheritance tax can leave many families with a sizeable bill to pay when a loved one passes away. With the tax threshold stuck on a 13-year freeze, and house prices and inflation rates rising, more estates are being dragged into the bracket. However, there are a few routes Britons can take to boost their personal inheritance tax threshold.

Inheritance tax is charged on a person’s estate if the total value exceeds £325,000. This is the current tax-free threshold for the 2022-23 financial year.

The total estate figure is determined after the value of the person’s assets (cash, property, personal possessions and investments) are added together.

If total assets exceed £325,000, a 40 percent tax will be applied to the rest of the estate.

According to research by Wealth Club, around one in every 25 estates currently pay the tax, and even more are expected to exceed the threshold.

Alex Davies, CEO and founder of Wealth Club said: “The Treasury raked in £2.9billion from inheritance tax from April to August this year, which is £300million more than over the same three months a year earlier.

“This is fuelled by soaring house prices and years of frozen allowances, made worse by recent double-digit inflation.”

However, he continued: “The tax is a vital cash cow for the Treasury, and the extra £300 million collected in the last four months is certainly needed.

“The good news is that there are already several perfectly legitimate and sensible ways to reduce the amount of inheritance tax your family might have to pay on your death. It is for this reason that inheritance tax in some circles is referred to as a ‘voluntary tax’.”

Here are 10 ways to reduce inheritance tax bills, according to experts.

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Make a will

The first step Britons can take to boost their inheritance tax threshold is to make a will.

Mr Davies said: “Without it, your estate will be shared according to a set of pre-determined rules. That means the taxman might end up with more than its fair share.”

Use gift allowances

Every year, people can give up to £3,000 away tax-free, known as the annual exemption.

Mr Davies said: “If you didn’t use [the gift allowance] last year, you can combine it and pass on £6,000.

“You can also give up to £250 each year to however many people you wish (but only one gift per recipient per year) or make a wedding gift of up to £5,000 to your child; up to £2,500 to your grandchild and £1,000 to anyone else.”

Make larger gifts

People can also pass on as much as they like IHT-free, as long as they live for at least seven years longer from the date of payment.

Mr Davies said: “So long as you live for at least seven years after giving money away, there will be no IHT to pay.”

Leave a legacy and give to charity

Gifts to charities are exempt from IHT provided they are made outright, according to Maria Lonergan, Partner at JMW Solicitors.

These gifts can also lower the inheritance tax rate for the rest of the person’s estate.

Ms Lonergan explained: “When someone has passed away and a gift of 10 percent or more of a taxable estate has been made [to a charity], the rate of IHT [to paid on the rest of the estate] is reduced from 40 percent to 36 percent.”

According to a report, gifts left in wills currently raise £3.4billion annually, which accounts for 16 percent of all fundraised income for UK charities, and this number is expected to double again by 2050.

Use the pension allowance

Mr Davies said: “Pensions are not usually subject to IHT – they can be passed on tax efficiently and, in some cases, even tax-free.

“If you have any pension allowance left, make use of it.”

Set up a trust

Trusts have traditionally been a staple of inheritance tax planning, according to Mr Davies.

He explained: “They can mean money falls outside an estate if you live for at least seven years after establishing the trust.”

However, he notes: “The related taxes and laws are complicated – you should seek specialist advice if you’re considering this.”

Invest in companies qualifying for Business Property Relief (BPR)

If someone owns or invests in a business that qualifies for Business Property Relief, they can benefit from full IHT relief.

Mr Davies said: “The majority of private companies and some AIM-quoted companies [qualify]. You must be a shareholder for at least two years and still be on death, though.”

With investing, capital is at risk.

Invest in an AIM IHT ISA

ISAs are tax-free during a person’s lifetime but when they die, or when their spouse dies later, they could be subject to the 40 percent IHT.

Mr Davies said: “An increasingly popular way of getting around this is by investing your ISA in certain AIM-quoted companies, which qualify for BPR.

“You must hold the shares for at least two years and if you still hold them on death you could potentially pass them on without a penny due in inheritance tax.”

Back smaller British businesses

The Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) also offer a generous set of tax reliefs.

Mr Davies said: “SEIS offers up to 50 percent income tax and capital gains tax reliefs, plus loss relief if the investment doesn’t work out. But EIS and SEIS investments also qualify for BPR, so they could be passed on free of IHT.”

Invest in commercial forestry

An underused option to boost the IHT threshold is to invest in commercial forestry.

Mr Davies said: “Pension funds and institutions have long ploughed money into forestry. The Church Commissioners has a forestry portfolio worth £400 million. Commercial forest investments should be free of IHT if held for at least two years and on death.

“You should also benefit from capital appreciation in the value of the trees (and the land they are on) and from any income produced by harvesting the trees and selling the timber (this income may also be tax-free).”

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