Potentially exempt transfers
People can gift most assets, including cash and shares. However, it has to be an outright gift from which they no longer benefit. This excludes giving away the family home and continuing to live there, unless they pay a market rent.
Using trusts
There are different trust arrangements that can be used in inheritance tax planning. This area of financial planning can be complex and appropriate advice is required.
Business property relief schemes
Investing in assets that qualify for business property relief, such as enterprise investment schemes or many of the shares listed on the Alternative Investment Market, can reduce the size of a taxable estate. Qualifying assets must have been held for at least two years at the date of death. However, these are often high-risk investments.
Life assurance
A whole of life assurance policy can be used to pay a tax bill on death. The policy should be held in trust to avoid the proceeds falling into the estate. However, life assurance can be expensive, especially for older people or those in poor health. People should therefore ensure they can afford to continue paying the premiums before taking this route.
Pensions
Pension assets sit outside of somebody’s estate for inheritance tax purposes, which means pension wealth can be passed through the generations tax-free. As a consequence, pension funds can play an important role in effective inheritance tax planning.
If death occurs before the age of 75, all payments from a pension on death are tax-free whether the benefits have been taken or not. This could mean it is more tax efficient for an individual to draw income from other wrappers, such as savings accounts or Isas, and leave pension investments untouched.
Independent financial advice
Effective financial planning can reduce a potential tax liability by many thousands of pounds. However, the rules are complex and each person’s situation and requirements are different. Getting it wrong could be an expensive exercise. The best approach for most people is to take independent financial advice.
Patrick Connolly, head of communications, Chase de Vere
