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Death & Taxes

Benjamin Franklin said famously that ‘in this world nothing can be said to be certain, except death and taxes’.

Neither subject – death or tax – makes for cheerful conversation, and in combination, they are downright miserable! This is probably one reason why Inheritance Tax (IHT) is a conversation left unspoken within families until it’s too late. Only last year almost £3bn was paid in IHT, yet much of it could probably have been avoided.

The basic IHT calculation is fairly simple. When someone dies, the value of their total net assets is worked out. Each individual is currently allowed to pass on £325,000 without paying tax, but above this level, the entire estate is taxed at 40%. So, for example, on an estate valued at £1m, the beneficiaries would have to pay £270,000 in tax (£1m – £325,000 x 40%). Transfers between spouses, or civil partners, are however entirely exempt and the introduction, in 2007, of a transferable zero rate band essentially means that the ‘tax free’ estate for couples has effectively doubled in size to £650,000.

There are a number of strategies for reducing inheritance tax, including gifting, insurance and the use of exemptions & reliefs. It’s often complicated, so it always a good idea to seek professional advice, but some of the strategies used are summarised below.

Giving away assets

Perhaps the simplest one is to decide whether you can afford to give away any assets. There is an annual allowance and various other smaller gifts can also be made with no tax bill. There is also an exemption linked to any gifts made out of ‘surplus income’.  For example, if your annual income is £50,000, but you can show that your normal annual spend is £30,000, then subject to meeting certain criteria, the remaining £20,000 could be gifted tax-free each year.  Any other gifts are classified as ‘potentially exempt transfers’ (PETs) and only fall outside your estate entirely after seven years. You could choose to use one of these exemptions or reliefs to pay for a life assurance policy, the proceeds of which could then pay any remaining inheritance tax liability.

If making outright gifts is not right for you for whatever reason (maybe you’re just not that sure about your son’s new girlfriend!) then other options could be gifting into a discretionary trust. Other trust options, such as loan trusts or discounted gift trusts, also enable you to keep some access to your savings whilst reducing the value of your estate. Again, at least a seven-year period is needed for any of these options to be effective.


Business and agricultural property are also subject to certain exemptions. Although originally set up to ensure that family businesses were not dissolved on death, several funds now exist that enable a diversified investment into numerous AIM-listed or privately held smaller companies. These funds take advantage of the business property relief rules and therefore, you could keep full control and access to your assets, as well as ensuring that no IHT is payable by your estate after just two years. However, these investments are typically relatively risky and so caution is required.

Often the best plan will include more than one of these options. A good financial planner can not only help you to work out the best solution for your own personal circumstances & objectives, but also offer an independent perspective in a potentially difficult family discussion.

Ian Thomas is authorised and regulated by the FCA. This article is intended to provide helpful information of a general nature and does not constitute financial advice.


About the Author:

Ian Thomas has over 25 years’ experience in financial services and has previously worked at JP Morgan, Fidelity, Old Mutual Wealth and AXA. In 2011 he established Pilot Financial, which offers integrated financial planning and wealth management services to private clients, together with workplace pensions and employee benefits advice to businesses. Ian studied at Universität Düsseldorf and the University of York and holds a BA (Hons) in Economics. He is both a Certified and Chartered Financial Planner and also a Chartered Wealth Manager.

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