Ask a Planner answers: reducing liability for inheritance tax

Tuesday, June 7, 2016

The question,from C H Tooke, 86 from Norfolk

At my age is there anyway I can reduce my liability for inheritance tax?

The answer, from Chris Wicks CFPTM, Bridgewater Financial Services Limited

It is never too late to try to reduce your liability to inheritance tax since you have nothing to loose. Most options require you to live either 2 or 7 years and the worst case scenario is that your IHT liability stays the same if you don’t manage to live that long. Here is a brief summary of your main options:

  1. Annual gift allowance – you can give away £3000 per year (£6000 if you have failed to use the previous year’s allowance) and this leaves your estate immediately. You can also make other gifts in consideration of marriage
  2. Small gift allowance – you can give away as many gifts of £250 as you like and these instantly leave your estate.
  3. Gifts out of income – If you have a genuine surplus of income over expenditure you can give away the surplus and this will immediately leave your estate.
  4. Potentially Exempt Transfer – You can give away as much as you want and provided that you live 7 years the value will leave your estate entirely. As long as you live at least 2 years part of the value of the gift will be reduced and the amount of the reduction (known as tapering relief) will increase over the 7 years.
  5. Business Property Relief (BPR) – If you invest in certain businesses such as EIS shares and unquoted trading companies, provided that you live at least 2 years the value of the shares will cease to form part of your estate. There is no limited to tThis is not for the faint hearted as these types of companies can go bust or suffer substantial reductions in value due to their greater vulnerability as smaller businesses.

You clearly need to take stock of your position before making any decision about inheritance planning. For one thing, you should determine whether you actually have an IHT problem. If you are a widow, your estate will be entitled to twice the current nil rate band (i.e. 2 x £325,000 = £650,000) before any tax becomes payable. You should also remember that IHT is not really your problem. It is one for your family and heirs. You need to make sure that you retain sufficient assets and income to meet your own needs before you give away anything. Options such as BPR are only really suitable where you have a substantial investment portfolio or are well catered for in other areas and therefore do not need the capital.

Above all, you should take proper professional advice before doing anything to make sure that you achieve the best balance between reducing the IHT on your estate and maintaining a comfortable standard of living for yourself.

Chris Wicks CFPTM
Bridgewater Financial Services Limited