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How to minimise inheritance tax

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Thursday September 12, 2013 at 11:14am
Back in 2007 George Osborne promised to “take the family home out of inheritance tax”. This hasn’t happened, in fact the nil rate band has remained frozen at £325,000 and will remain at this level until 2018. With increases in the value of the family home it could be that your home and certainly other assets will be subject to inheritance tax, meaning less of your wealth being passed on to your family.

There are ways you can protect your wealth and save on inheritance tax. There are 4 steps that I encourage all clients to take:

Make a will

This is always the first step I advise clients to take as unless you have a current and up to date will the government controls how your estate will be distributed, which is very unlikely to be in line with how you would have wanted your wealth shared. My blog How to Make a Better Will offers some pointers on issues to consider and an approach you can take to getting a Will that will protect your assets.

As part of the will writing process you should receive tax and estate planning advice about minimising your inheritance tax liability.

Use trusts to protect your assets

This is advice I give to clients during their lifetime, not just as part of the preparation of their Will and general estate planning.

Trusts allow you to pass on your wealth to whoever you like, most often your spouse and children, but maintain a degree of control over when and how the assets can be accessed. A letter of wishes, for example, can guide the trustees on how money should be used, for example for a deposit on a house or university fees, but not perhaps to buy a flash car or take a round the world cruise.

Any assets placed in trust, up to the £325,000 IHT threshold benefit from Trusts are especially useful for unmarried couples who don’t have the benefit of being able to leave assets to their partner and instead would have assets over £325,000 taxed at the full 40%.

Consider transferring assets

Any transfers of assets between a married couple (or a couple in a Civil Partnership) are exempt from inheritance tax (IHT). You may choose to give away gifts to your family members or others, which again will be tax free, provided you live for another seven years after you make the gift.

You do have to be careful about doing this, especially if you are considering transferring your home for example, as unless you get proper advice you could find the house will remain in your estate for IHT purposes.

Donate to charity

For many the idea of the government clawing back their hard earned savings when they die is just too much to stomach and they would rather give their money to charity. Since April 2012, anyone that leaves 10% or more of their total assets to charity pays a reduced rate of 36% IHT on the remaining assets. So worth considering if you have a charity you are committed to and would like to see benefit after your death.

Andy Parker
Chartered Financial Planner, Birmingham

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Parker Chartered Accountants and Financial Advisors is the trading name for PLW Advisors Ltd (Registered No. 10396831), and Parker Financial Planning LLP (Registered No. OC347027). Parker Financial Planning LLP is authorised and regulated by the Financial Conduct Authority. All companies are registered in England and Wales – registered office contact details here