Inheritance Tax Planning- 10 Ways to Reduce IHT Legally

Many believe inheritance tax (IHT) is unfair because it’s a death tax that people have to pay on assets that the deceased bought with their after-tax income. Unfortunately, no matter what your income tax status is, IHT is usually 40% on death estates that are taxable. But, there are some exceptions and because of these, inheritance tax planning is essential if you want to legally reduce the amount you pay.

Here at Newnham & Son, we have vast amounts of experience with inheritance tax planning, a key reason why we can help you reduce your IHT in a legal way. Read on to find out more about more about IHT planning and the many ways in which we can help you legally reduce the amount you pay.

1- Put thought into who you leave your house to

The best bit of inheritance tax advice we can give you is to leave your estate to a direct linear if possible. This is because, in most cases, you can use the residence nil rate band. This can be a great strategy, even when downsizing.

2- Invest in EIS and SEIS qualifying shares

If you want to make sure you don’t have to pay any IHT, then holding them in shares could be your best bet. That said, this is only applicable if you hold them for two years or more. When it comes to qualifying enterprise investment scheme (EIS) shares, you can invest up to £1 million. With Seed EIS (SEIS), you can only invest up to £100,000. This system also comes with capital gains tax and income tax advantages.

3- Make sure you qualify for BPR

If you hold unquoted shares, they may qualify for Business Property Relief (BPR) at up to 100% for IHT purposes. You can achieve this by leaving your shares to a loved one or use a ‘double option’ agreement to transfer them upon death. But, be careful, if the shares sell before death, the proceeds may incur IHT.

4- Replace your director’s loan account credit balances

If you have money in your company, this may be subject to IHT if you don’t replace your director’s loan account credit balances with extra shares. If you meet all the requirements, these could also be eligible for BPR.  

inheritance tax planning

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5- Learn more about ISAs

Unlike popular belief, individual savings accounts (ISAs) aren’t exempt from IHT. That said, you can transfer the tax-free status of the ISA to your partner upon death. Alternatively, you could invest into a qualifying alternative investment market stocks ISA which can lead to IHT savings after a two year period.

6- Make a discounted gift trust investment

Another area of inheritance tax planning that many overlook is making a discounted gift trust investment. Aside from potentially removing a portion of the investment out of your estate, this provides income for life. You can gift this investment to your heirs upon death.  

7- Life policies in trust

If you’re paying life policies into trust, you’ll be happy to know that these aren’t normally subject to IHT. Better yet, this also applies to existing life policies. But, be careful, you may have to pay IHT on the transfer.

8- Pensions and marriage

If you’re paying towards your pension, you need to make sure that you appoint beneficiaries. If you don’t you will have to pay IHT. Despite this, you shouldn’t have to pay IHT on assets that you leave to your civil partner or spouse. And, don’t forget about the nil rate band and residence nil rate band!

9- Make lifetime gifts

You don’t have to pay IHT on gifts of up to £3,000 a year as this is your ‘annual tax exemption’. If you gift more than £325,000 in the 7 years before your death, the person in question will have to pay IHT. To find out more about gift and IHT planning, visit the government’s website.

10- Gift part of your estate to charity

Gifting to charity is a great way to reduce your IHT. In fact, by gifting 10% or more of your estate to a registered charity or trust, the IHT could go from 40% down to 36% on your taxable estate.

inheritance tax planning

Source: Pixabay

Create an inheritance tax planning strategy with your accountant

When it comes to inheritance tax planning, it’s essential that you choose a strategy that is specific to your individual needs. The best way to achieve this is to seek professional advice. That where we come in!

At Newnham & Son, we know everything there is to know about IHT and how to legally reduce or avoid it altogether. If you’d like to find out more about how we can help you, contact us today. We’d be more than happy to help!

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