Traditionally the preserve of the very wealthy, inheritance tax (IHT) looks likely to catch far more of us in the next few years – as the threshold remains frozen at £325,000 and house prices continue to rise.
In our recent survey, 55% of Which? members had an estate worth more than the nil-rate band, and 26% exceeded the double allowance of £650,000 that married couples and civil partners can effectively claim (the first partner’s unused ‘nil-rate band’ passes to the survivor).
Saving IHT (or escaping it altogether) is easier for some people than others. If your estate is mostly property, it’s hard to get round paying IHT if you go over the limit.
Giving away the house you live in is not accepted as a genuine gift by IHT, even if it’s something you want to do. Unless you pay commercial rent to the new owners (your children) or plan to have them live with you and split the household bills 50/50, escaping a final tax bill is almost impossible.
If your assets are more varied, however, there are ways of reducing your final estate and cutting IHT…
Making lifetime gifts
The simplest is to make lifetime gifts. You can give away £3,000 each year with no impact on your £325,000 allowance. Larger gifts may also be tax-free, but only if you survive for at least seven years after making them. Called potentially exempt transfers (PETs), they can be for any amount.
Gifting assets early obviously makes sense, but how soon should you start? You don’t want to risk leaving yourself and your partner short – but delay too long and you risk being caught by the ‘seven year rule’…
To save on IHT, gifts have to be genuine and irrevocable, so ‘giving it all away’ isn’t something to be undertaken lightly. Smaller, regular gifts may be safer than enormous one-off transfers – and over the years these can still mount up to a tidy amount.
It’s worth remembering that it’s only the ‘excess’ above your nil-rate band that is hit by IHT (at 40%) – the bulk of your estate may survive intact, with only a small bill for your heirs.
Back on the agenda?
With an election in the offing, IHT has the potential to become a hot topic once more – as it was in 2007, when George Osborne’s pledge to increase the nil-rate band to £1m led the then Chancellor, Alistair Darling, to introduce the double allowance for married couples. In office, Mr Osborne has instigated a nil-rate band freeze until 2018, but the Prime Minister recently repeated talk of a £1m threshold, so perhaps a change of plan is afoot?
What do you think about IHT? Is it worth trying to avoid, or shouldn’t people concern themselves with something their children may not have to pay?