1. Make a will and review it regularly. If you die without making a will, your assets will be divided between your relatives according to the intestacy rules. This will be after IHT is paid at 40% on any value above £325,000 that goes to anyone other than your spouse or civil partner. If you have no surviving relatives, the same tax will be paid but the Crown (i.e. the government) will claim the balance.
2. Rewrite your will to ensure that at least 10% of your net estate, after deduction of the nil rate band of £325,000, is left to charity. This will reduce the IHT rate on your taxable estate from 40% to 36%. The exact calculation of your ‘net estate’ is quite complicated, so take professional advice when drawing up or amending your will.
3. Rather than just living together as a couple, get married or register a civil partnership. Otherwise, your surviving partner will have to pay IHT on anything inherited from you that exceeds the nil rate band, currently £325,000. Do not forget that there are some potential tax and other costs to consider. But your spouse or civil partner can now inherit your unused nil rate band when you die, potentially saving even more tax (see also Tip 8).
4. Invest in business assets to save IHT. Any shares you own in unquoted trading companies, including companies listed on the AIM stock exchange, are free of IHT once you have held them for two years. You do not need to be involved in the company for the shares to qualify. Any interest you hold in an unincorporated business will generally also be free of IHT.
5. Make regular gifts out of your annual income to whomever you choose. As long as you establish a pattern of gifts that can be shown to be covered by your net income, without reducing either your capital assets or your normal standard of living, those gifts are free of IHT. The recipients of these gifts need not be the same people each year.
6. Make gifts totalling £3,000 each tax year from your capital resources. These gifts are free of IHT and, if you forget to make your £3,000 gift one year, you can catch up in the next tax year by giving a total of £6,000. Remember, both you and your spouse or civil partner can each give £3,000 every tax year in addition to gifts you make out of your regular income.
7. Use the inheritance tax marriage exemption for gifts. If your son or daughter is about to marry or register a civil partnership, then you and your spouse or civil partner can each give them £5,000 in consideration of the marriage, and the gift will be free of IHT. This is in addition to any smaller gifts you make out of your regular income each year. The marriage exemption can also be combined with your £3,000 a year annual exemption to allow you to make bigger exempt gifts. The IHT-free gift you can make on the occasion of a grandchild’s wedding is £2,500. Civil partnerships attract the same exemptions.
8. Check whether your elderly relatives have ever been widowed. Widows and widowers who die after 8 October 2007 inherit the unused proportion of their late spouse or civil partner’s nil rate band – even if the spouse died many years ago. This could mean that up to an extra £325,000 of the estate will be tax free.
The Financial Conduct Authority (FCA) does not regulate tax advice, so it is outside the investment protection rules of the Financial Services and Markets Act and the Financial Services Compensation Scheme.
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