Investment - Articles - Seven ways to beat the death tax

 Charlene Young, pensions and saving expert at AJ Bell, highlights seven things you can do to maximise what you pass on to your loved ones: “Whilst the death tax is dubbed Britain’s most hated tax, only around 1 in 20 estates pay it. But those numbers are rising, along with the amount of money HMRC is raking in each year.

 “Everyone can pass on up to £325,000 before IHT applies thanks to the nil rate band. An additional £175,000 residence nil rate band is available where homeowners leave a property to their direct descendants.

 “Here’s what investors should do today to ensure they can maximise the value of the estate they leave for their loved ones and keep it out of the taxman’s clutches.”

 1. Make a will

 “This helps ensure your estate is split according to your wishes and will be a huge help to the people sorting out your affairs.

 “If you die with no will, your estate will fall under the rules of intestacy, which could mean a higher IHT bill, and in the absence of any surviving relatives your estate could even pass to the Crown. A common misconception is that unmarried partners living together have the same rights as those in a marriage or civil partnership. Under intestacy rules, they will not inherit.

 “You can work out the rough value of your estate today by making a list of your assets – this includes your bank accounts, investments, ISAs and property as well as any debts and liabilities that could be deducted.

 “Pensions like SIPPs are generally outside of your estate and wouldn’t form part of your will, but you should check the position with your provider(s) as to what type of scheme you are in. Any older schemes with death payouts that would fall into your estate should be written into trust. Your provider can help you with this.”

 2. Make the most of spousal transfers

 “Anything gifted to a spouse or civil partner in your lifetime, or left to them after you die, will be exempt from IHT. On top of this, your spouse will also inherit the value of your unused nil rate band, as well as any unused residence nil rate band. Between two of you, this means up to £1 million could be left to direct descendants without any IHT falling due.

 “This exemption doesn’t apply to gifts between unmarried partners, even if you have lived together for many years.

 “It’s worth getting specialist legal and tax advice when it comes to wills and how to make the best use of spousal transfers and unused nil rate bands. This is particularly pertinent if you have business or investment assets that might qualify for valuable reliefs such as business or agricultural property relief. For example, it might be better from a tax point of view to leave those assets to children or other family members where they can benefit from up to 100% IHT relief, and assets that would’ve otherwise been taxable to a spouse or civil partner to make full use of the exemptions and transferable nil rate band(s) on second death.”

 3. Use annual exemptions and allowances

 “As well as gifts between spouses, there are other gifts you can make each tax year that are exempt from IHT and reduce the value of your estate. As a reminder, a gift is anything that has a value – so as well as money/cash it could be investments or other property.

 “The ‘annual exemption’ lets you give away a total of £3,000 each year. You can give £3,000 worth of gifts to one person or split between several others. Unused exemption can be carried forward once to the next tax year.

 “You can also make unlimited small gifts of up to £250 per person, if you haven’t used another allowance to make a gift to the same person.

 “There are also wedding gift allowances for tax-free gifts to someone getting married or entering a civil partnership. These are up to £5,000 for a child, £2,500 to a grandchild or great-grandchild or £1,000 to anyone else. The wedding gift allowance can be combined with other allowances.

 “Other gifts that are not exempt or within the allowances above are called potentially exempt transfers, meaning they only escape IHT if you survive for seven years after making it. If you die within seven years then the value of the gift is added back into your estate, but taper relief might reduce the rate of IHT on it depending on the amount of time that has passed.

 “A powerful gifting allowance that is often missed is making gifts from excess income. You can set up regular gifts from your extra income without limit, provided you can show that they do not reduce your standard of living. The best way to evidence this is to keep records of your regular income and show that you’re not having to cut back on your normal spending to make them. The records will also be needed when it comes to administering your estate and claiming the exemption.”

 4. Retiring? Think about drawing from non-pension assets first

 “The primary purpose of a pension is to save for retirement, but they can also be used to pass on money through the generations in a very tax-efficient way.

 “Pensions are usually free from IHT as they do not form part of your estate unlike other investment accounts such as ISAs.

 “If you draw on non-pension income and capital first, you are reducing the value of your estate without reducing your pension pot. Pensions can usually be passed on should you die before age 75 free of income tax (as well as IHT). On death after you reach 75, anything left to your beneficiaries is taxable as income when they draw it themselves. At this point you could consider using your pension to provide you with a regular ‘excess’ income (above your normal spending) so that you can use it to make regular gifts from income.”

 5. Leave money to charity

 “Gifts you make in your lifetime to UK registered charities are free from IHT. This also applies to charity legacies you leave on death in your will. You can also reduce the overall rate of IHT that applies on your taxable estate if you leave at least 10% of what’s known as your ‘net estate’ to charity.

 “Your net estate is your total estate, less the nil rate band(s) available. If the charitable legacies are more than 10% of this net estate value, their value is deducted to give your taxable estate – which will then be taxed at 36% instead of the headline rate of 40%.

 “If you are considering making substantial gifts in your will, you should instruct a solicitor to advise how best to achieve this.”

 6. Life insurance

 “There are two things to consider here – writing any existing policies into trust as well as insurance to pay any tax bill.

 “Depending on cost, a simple way to plan if in reasonable health is to take out life insurance to pay the bill, or to cover IHT that could become payable on large gifts for seven years.

 “You should also review any life insurance you already have, particularly what your employer might provide and even where you think you might be under the IHT thresholds. That’s because the payouts from policies will count as part of the estate unless your policy is written in trust.

 “Writing policies in trust removes them from your estate and means your loved ones don’t have to wait for probate to make a claim. As IHT must normally be paid within six months to avoid interest and needs to be settled before probate is granted, insurance could make things easier for your loved ones and prevent assets having to be sold to help pay any bill. Writing a policy into trust can usually be done simply and at no cost if you speak to your provider.”

 7. Have fun and spend it

 “It isn’t really a tip as such, but a reminder that the simplest way to avoid paying IHT is to spend and enjoy your wealth. That could be through the gifting allowances and strategies outlined above, or by making big splurges in retirement like that bucket-list holiday or that sports car you’ve always dreamed of.

 “Your wealth and retirement have been hard-earned and as the saying goes – you can’t take it with you.”