Sarah Coles of Hargreaves Lansdown has urged landlords and those with substantial assets to consider making ‘gifts’ to avoid paying a sizable chunk of tax when they die.
The inheritance tax nil rate band has been £325,000 since April 2009 – which is the allowance of assets we can pass on without paying any inheritance tax – while it was frozen until at least April 2028 in the Autumn Statement last week.
Meanwhile the residence nil rate band – applying when you leave your main home to a direct descendent – has also now frozen at £175,000 until April 2028.
Sarah Coles, senior personal finance analyst, Hargreaves Lansdown, said: “If you have a significant estate to leave, there are six approaches that are commonly considered for tackling IHT. And while one of them might work for you, they all come with possible problems.
“If you want to be absolutely certain you’re not leaving an IHT headache behind, then it may be worth taking out a life insurance policy to cover your tax liability. This should be written in trust, so it falls outside of your estate, and there’s no IHT to pay on it.
“If you insure your bill, you don’t get the satisfaction of beating the taxman, but you are preventing him from causing problems for your loved ones after you’ve gone.”
6 common considerations from Hargreaves Lansdown- and their potential pitfalls
- You can give gifts during your lifetime. You have a gift allowance of £3,000 each year that falls out of your estate immediately for inheritance tax purposes. You can also give small gifts of up to £250, specific gifts for family weddings and unlimited regular gifts from income. You can carry forward unused annual allowances for one tax year. This can be an incredibly useful way to cut your tax bill, but you need to be confident you’re giving away money you won’t need later. None of us can know if we will eventually need care, when we may regret giving so many of our assets away.
- If you try to give away your home before you die, but continue to live in it or benefit from it in any way, it won’t be counted as having been given away at all. So you’ll have paid for the legalities of swapping ownership without any benefit.
- If you buy into a scheme that puts your home into a trust in an effort to avoid IHT, there’s no guarantee that these schemes will work, because the taxman may consider them to be tax avoidance. There are also significant costs to consider.
- If you release equity from your home and spend the money or give it away, it could cut your IHT bill, but you need to factor in the up-front costs and the ongoing interest. If you don’t live for seven years you could save far less than you expect (under the rules around potentially exempt transfers). If you live for much longer, you could end up spending more on equity release than you would have on IHT (because of the interest).
- Some investments are free of inheritance tax, such as qualifying investments on the Alternative Investment Market. However, not all shares on this market qualify, and those that do will be smaller and newer companies, which are high risk investments, so should only be considered as a small part of a large and diverse portfolio, and only then if they suit your circumstances.