Three ways to legally save inheritance tax

It was reported recently that a woman has been sentenced to two years in jail for attempting to evade inheritance tax (IHT) by declaring that she had inherited assets from her aunt’s estate amounting to £285,000 rather than their true value of £1.5 million. Most of us would not consider resorting to illegal activity to reduce our IHT bill, but what can be done to legitimately reduce the amount of IHT which our loved ones will pay? We have three suggestions:

IHT reliefs

There are a number of reliefs which can reduce the IHT payable on your estate and you should ensure that you maximise your entitlement to these. One of the most important reliefs is the spouse relief available for assets left to a surviving spouse or civil partner. This relief has the advantage that any IHT bill is then deferred until the death of the surviving partner. The Will of the late entertainer Bruce Forsyth is an example of the use of this relief where the bulk of his estate was left to his much younger spouse. This achieves a deferral of tax and enables the surviving spouse to make lifetime gifts if they wish which will be tax free as long as they survive the gift by seven years.

Other valuable reliefs depend on the nature of the asset owned. Agricultural property relief and business property relief can reduce the tax bill on qualifying assets to nil but care needs to be taken to comply with all the requirements and these can be complicated.

Lifetime gifts

There are a number of exemptions that can be claimed in respect of lifetime gifts. These may be rationalised when the government has completed its current review into the operation of IHT. In the interim, if IHT is a concern, you should ensure that you are using your annual IHT exemption of £3000. One less well known exemption applies to regular gifts made out of income as long as the person making them is left with sufficient income to maintain their normal standard of living. This can be very useful for those with excess income and there is no requirement to survive any particular period after the gift is made for it to be tax free. The fact that the gifts are made on a regular basis is important and should be evidenced by an initial letter.

Larger gifts out of capital are free from tax after seven years from the gift have elapsed. Care should be taken when embarking on a series of lifetime gifts as there are traps and surprising results for the unwary. For example, if you wish to ensure that the recipient is not liable for any IHT due on the gift if you die within seven years you will need to make specific provision in your Will that any IHT on the failed gift is instead paid by your estate.

Placing assets outside of your estate

If you have an insurance policy that pays out on your death you should consider placing this in trust which ensures that the sum payable on your death falls outside of your estate, is not liable to IHT and can be claimed by the trustees before probate of your Will is obtained.

Any sums that you pay into a pension policy will also generally be held outside of your estate and, with the recent pension freedom changes,  whatever is left in your pension pot at your death can be drawn on by your chosen beneficiaries.