Avoiding or Reducing Inheritance Tax
There are many ways that you can avoid or reduce your liability to pay Inheritance Tax (IHT). All of the methods we discuss on this website are perfectly legal and acceptable to Her Majesty’s Revenue and Customs (HMRC).
Some of the methods can be complex and it is important that take professional financial advice from an expert to help you to choose the right options for you. We will be pleased to discuss each option with you and explain how each one can save you Inheritance Tax.
The basic approach to reducing IHT liability is to reduce the value of your estate over a period of time. Put simply, the smaller the value of your estate when you die, the less your IHT liability will be.
Among the many ways of reducing your liability, there are items of particular importance:
Discounted Gift Trusts
Discounted Gift Trusts are a method of reducing Inheritance Tax liability suitable for both single people and couples. They are sometimes referred to as Discounted Gift Plans or Bonds.
The potential advantages of investing in such Trusts are that:
• They immediately reduce the value of your Estate in relation to IHT
• They reduce the value of your Estate even further if you survive more than seven years after investing
in the Trust
• They enable you to make withdrawals from the plan whilst ensuring that the funds are held in Trust
and outside of your Estate
• They allow any remaining funds after your death to be passed to your loved ones
• If the value of the bond grows faster than the level of withdrawals made, the growth in value will not
form part of your estate for IHT purposes
In this notional example, Mr. Adams chooses to invest £100,000 in a Discounted Gift Trust. Mr. Adams is 60 years old and in good health. He chooses to withdraw £5000 per annum from the plan.
His investment immediately receives a discount of £66,530, which means that this amount is not liable to Inheritance Tax. (Note: on each occasion the discount amount is calculated based upon the investor’s age, health and the amount of withdrawals to be made from the plan. Each calculation is subject to agreement by HMRC.)
The remaining £33,470 is treated as a Potentially Exempt Transfer (PET) – see
Allowances and Exemptions - and will be subject to Taper Relief. If Mr. Adams survives another 7 years it will become totally exempt from Inheritance Tax altogether.
|
|
No Discounted Gift Trust |
Death within 7 years
of the start of the
Discounted Gift Trust
|
Death after 7 years
of the start of the
Discounted Gift Trust
|
|
Original Investment |
£100,000 |
£100,000 |
£100,000 |
|
Discount Applicable |
n/a |
£ 66,530 |
n/a |
|
PET value |
n/a |
£ 33,470 |
n/a |
|
Amount potentially
liable to IHT |
£100,000 |
£33,470 |
£0 |
|
Maximum amount
of IHT |
£40,000 |
£13,388 |
£0 |
If you would like more information on Discounted Gift Schemes or would like an estimate of the discount you may be eligible for, contact us on 08000 430276 or though the
Contact us page for a no obligation discussion.
Loan Scheme Trusts (also referred to as Gift and Loan Scheme Trusts)
Loan schemes are particularly suitable for individuals who want to retain access to their original capital but use the scheme as a vehicle to avoid paying increasing Inheritance Tax on the growth of that capital over time. With this type of scheme, all growth on the original capital remains outside of the individual’s estate for the purposes of Inheritance Tax.
Loan Schemes work in the following way:
• You establish a Trust and loan the Trust an amount of money.
• Under the Trust rules you set up the right to have the capital paid back to you in full or partially in
smaller staged payments
• The Trust invests the original capital to produce growth (often in an Insurance Bond or similar)
• Note that any amount of the original capital loan not repaid at the time of death will form part of your
estate for IHT purposes, but the capital growth will not
The illustrative table below shows the potential reduction of IHT payable if Mr. Adams loaned his Trust £100,000. The table shows the effects after 5 years during which we assume that the original £100,000 would grow to £150,000.
In Option 1 Mr. Adams does not take any repayments from the loan and in Option 2 he takes £5000 per annum in repayments.
These two illustrations are just two possibilities of many that can be used to help reduce or avoid Inheritance Tax liability.
|
|
No Loan Scheme |
Loan Scheme Option1
no repayments
|
Loan Scheme Option2
repayments at £5,000 p.a.
|
|
Original Investment |
£100,000 |
£100,000 |
£100,000 |
|
Original Investment & Growth after
5 years |
£150,000 |
£150,000 |
£140,000* |
|
Repayments made |
n/a |
n/a |
£25,000 |
|
Loan amount outstanding and potentially liable
to IHT |
n/a |
£100,000 |
£75,000 |
|
Amount which escapes IHT |
£0 |
£50,000 |
£65,000 |
|
Amount potentially liable to IHT |
£150,000 |
£100,000 |
£75,000 |
|
Maximum amount of IHT |
£60,000 |
£40,000 |
£30,000 |
*Assumes reduction in growth after £5,000 repayments are made
If you would like to speak to an adviser about reducing your IHT liability or arrange a no commitment consultation then contact us on
0845 053 2965 or alternatively please use the
Contact Us form.
Remember, the worst thing you can do is nothing – the government will benefit from your estate rather than your loved ones!