Avoiding Inheritance Tax

Following the latest attempts to extend the scope of Inheritance tax (IHT) we are now actively advising clients of ways to preserve capital and minimise the amount of family wealth that goes to the government.

IHT is levied at 40pc on all assets, including your house, worth more than the nil-rate band set at £285,000 for the current tax year.

Since 1997, the number of estates paying IHT has doubled from 18,000 a year to 36,000 while the tax has gone up by more than double from £1.6bn to £3.3bn, according to HM Revenue and Customs.

There are many ways to preserve capital and individuals need to take advantage of annual allowances, potentially exempt transfers and regular gifts from income.

Every year you can take advantage of IHT allowances to minimise your estate and cut back on the taxman’s take. Forward planning can potentially make you considerable savings as an individual can give away £3,000 a year to friends and family and £250 a year to an unlimited number of people, with every £100 given away, potentially saving £40 in IHT.

Unlimited potentially exempt transfers can also be made in the form of cash, property or other assets but for it to be completely free of IHT you must survive for seven years. A benefit will be noticed however after three years as the IHT levied on assets exceeding the nil rate band drops from 40pc to 32pc, gradually reducing to zero after seven years.

Regular gifts from surplus income can be made to cover anything from school fees to mortgage payments. Therefore parents or grandparents can get children off to a tax-efficient start in life by using Child Trust Funds (CTF) or stakeholder pensions.

CTF accounts allow any income gains to add up tax-free until the child can access the money at 18 and can be topped up by parents, grandparents, relatives and friends to the sum of £1,200 a year.

A stakeholder pension is an extremely good method of tax efficiency and grandparents who appreciate the need for retirement income can pay up to £2,808 a year into a stakeholder pension for their grandchild. The payments are not only free from IHT but are also topped up with basic-rate tax relief to £3,600.

For any individual thinking of ways to preserve capital the best course of action is to seek professional advice in order to grasp a thorough understanding of IHT planning and prevent the taxman getting a large cut of your family wealth."