HM Revenue and Customs have reported a monthly record of £483 million in inheritance tax revenue for March. In 2016-17 a total of around £4.8 billion was collected in Inheritance Tax – double the amount taken in 2002-2003.
So what can a person do to reduce their inheritance tax bill?
Many people are aware of the 7 year rule which says that if you make a gift and you don’t then survive for 7 years, it will be subject to inheritance tax at a tapered rate, depending on how many years you survive for.
What you may not appreciate is that not all gifts are subject to these rules. You can give away up to £3,000 a year and this will fall out of your estate for inheritance tax purposes.
In addition, you can make an unlimited amount of gifts up to £250 per person each tax year.
Parents may give their children a one-off gift of £5,000 if they marry or enter into a civil partnership.
Grandparents can similarly give a wedding/civil partnership gift of up to £2,500 without any inheritance tax implications – while other people can give up to £1,000 on this occasion.
Everyone has a personal inheritance tax limit of £325,000. In addition, a new Residence Nil Rate band has been available since 6th April 2017. This gives you a further allowance where you gift your home to a direct descendent. The allowance is being introduced gradually as follows:
- £100,000 in 2017 to 2018 tax year
- £125,000 in 2018 to 2019 tax year
- £150,000 in 2019 to 2020 tax year
- £175,000 in 2020 to 2021 tax year
If you gift above your allowances, the gift is known as a ‘potentially exempt transfer’ because if you survive for 7 years afterwards, it will be exempt from inheritance tax.
If you leave everything to your spouse or civil partner, you will not have used any of your allowances and they can use them instead. Alternatively if you do make some gifts to people other than your spouse or civil partner, your spouse or civil partner can take any part of the allowance that is unused.
A pension wrapper shelters your assets from inheritance tax because it is deemed to be outside of your estate. This includes any income drawdown schemes.
The majority of taxpayers can contribute up to £40,000 a year to their pension, although this is reduced for those earning £150,000+. Contributions can be made up until the age of 75.
If you invest in AIM and hold the assets for two years, the investments can be passed on free from inheritance tax after your death.
If you leave at least 10% of your ‘net estate’ to a charity, you can reduce your inheritance tax liability on anything over your combined personal allowance/RNRB from 40% to 36%. Your net estate is the value of your estate minus your inheritance tax allowance.