It will take some work, but if you want your loved ones to receive as large a proportion of your assets as possible, and the government as little as possible when you die, it’s worth it.

Inheritance Tax (IHT), payable by your beneficiaries at a rate of 40%, is swelling the government’s coffers. Last year, it received nearly £5 billion in IHT receipts. This year, they expect £6 billion.

Wouldn’t you prefer for your share of that to go to your spouse, children or grandchildren?

With careful planning and good advice, the amount your beneficiaries pay can be substantially reduced and even wiped out.

Agatha Christie once said: “One doesn’t recognise the really important moments in one’s life until it’s too late.” The same is true with IHT. The time to act to reduce the tax your beneficiaries will pay, is now.

To help, we’ve broken it down into 10 things you should do now, to reduce, or eradicate your IHT problem.

1. Understand the problem

How much would your estate lose in IHT if you died today?

Knowing the current total will help you to take advantage of the options available to reduce it. Whilst a financial planner will be able to give you an exact figure, our calculator will provide a close estimate.

2. Take advice

A knowledgeable and skilled financial planner, working with a solicitor, will be able to calculate the amount of tax which will be due when you or your spouse / partner dies.

They will then be able to recommend a strategy to reduce, or wipe out, the tax liability, which will dovetail with your other financial objectives.

3. Make a will

60% of people don’t have a will.

A will allows you to detail your wishes concerning your estate. It stops the money that should go to your family from being distributed according to intestacy laws, which may not work out the way you intend.

If written correctly, a will can also help to reduce the IHT paid on your death.

4. Already retired? Consider your income strategy

Your pension is there to support you through retirement, so using it makes sense.

However, it might pay to be a little more creative.

Your savings and investments may be subject to IHT when you die. But your pension pot is not. Although your beneficiaries may pay income tax, depending on your age at death.

Therefore, taking an income from your savings and investments before your pension, might be more beneficial. There’s a lot to think about though, such as the tax position of your potential beneficiaries, so taking expert advice is important.

5. Life Cover

If you have Life Cover, make sure it is put into trust. The proceeds will be outside of your estate for IHT purposes, avoiding probate and paying out quicker to your chosen beneficiaries.

If you are still working and your employer offers a ‘death in service’ pension scheme, make sure you have completed an ‘Expression of Wish’ form, so that the money goes to your chosen beneficiary.

6. Take steps to immediately reduce your estate

There are some things you can do which will immediately reduce the amount of IHT payable when you die.

These all involve giving money away, so shouldn’t be done without careful planning to ensure that it won’t detrimentally affect your financial future. However, you can make certain relatively small gifts which are immediately outside of your estate. These include:

  • Your annual exemption, which are gifts of up to £3,000 per year
  • Gifts in respect of a wedding; Up to £5,000 to a child (including step and adopted) from parents, £2,500 to a grandchild or great-grandchild, and £1,000 to anyone else
  • You can also give up to £250 a year to anyone who has not received either of the other IHT-free gifts from you

You can of course give any amount away that you like. If it’s more than the exemptions above, and not regular gifts from income, you will have to live for seven years for the full amount to be outside of your estate.

Once you have calculated the gifts you can afford to make, doing so can bring you untold joy. Being able to see the affect that ‘living inheritances’ can have on the lives of your loved ones, while you are still alive, can be very appealing.

Especially when so many younger people are building up large debts after going to university, or struggling to save enough money to get onto the housing ladder.

7. Could your investments be held more IHT efficiently?

Certain types of investments qualify for Business Property Relief (BPR). Once they have been held for two years, they are outside of your estate for IHT purposes. What’s more, you are still in control of the investment, making this option particularly attractive for people who don’t want to give money away.

However, these types of investment carry a significantly higher risk than many alternatives and should only be held if you are comfortable with that level of risk.

Again, your adviser will help you to understand this option in more detail and whether the benefits outweigh the risks.

8. Consider donations to charity

Donations to charities are free from IHT. Furthermore, if you donate 10% or more of your net estate to charity, the rate at which tax is paid on the remainder falls from 40% to 36%.

9. Insure the problem

If you don’t like any of the other options, because you don’t want to take the risk associated with a BPR investment, or you don’t like the idea of giving money away, taking out insurance might be the answer.

This is perhaps the simplest and least contentious way of dealing with an IHT problem. That’s because the bill still gets paid, but not by your beneficiaries!

It works like this:

  • Calculate the IHT payable when after you and your spouse / civil partner has died
  • Take out life cover, usually on a Whole of Life (WOL) basis, which pays out a sum equal to the IHT when it becomes due
  • While you are alive you pay the premiums on the policy, perhaps from spare income or by taking regular withdrawals from an investment

This method doesn’t avoid paying the tax; the government still gets the money. But, it’s a simple way of ensuring that your beneficiaries get the full value of your estate.

10. Spend, spend, spend!

“I’ll die with my last pound in the bank.”

For some people, that might sum up their attitude to IHT. But it’s actually quite hard to do, not least because you don’t know exactly when you will die and, if you own your house, it is within your estate.

Reducing the size of your estate sensibly; either through spending or the giving of gifts, is a valid way of cutting the IHT.

However, dying with the last pound in the bank isn’t usually achievable and you will either end up with no money to live on, or leaving more than you intended and saddling your loved ones with the stress of probate and IHT after all.

If that’s your strategy, it’s probably time for a rethink!

That’s exactly what you need…

A strategy.

To reduce the tax paid on your death and ensure the maximum possible amount is passed on to your beneficiaries.

That’s where we come in. We’ll work out the liability due and then produce a strategy to deal with the problem. Explaining the pros and cons of each option as we do, until a plan can be agreed upon.

If you would like to discuss your circumstances please get in touch by calling us on 0118 9879 400.