On Monday, I showed readers how they can fight back against Reeves’s decision to impose IHT on unused pension on death. Yesterday, I looked at all the options for gifting wealth to loved ones tax-efficiently, including one brilliant loophole that Reeves didn’t close.
In this third and final section of our series, I’m looking at seven more tax-fighting weapons you have in your arsenal.
Don’t delay deploying them. The earlier you act, the better.
Use the spousal exemption. Being married has few tax advantages these days but it’s a big help with IHT planning.
Married couples and civil partners can pass their estate to a spouse or partner entirely IHT-free, with no limits, known as inter-spousal transfers.
On top of that, the surviving partner will also inherit their tax-free £325,000 nil-rate band, and the additional £175,000 residence band. Together, these total £500,000.
The surviving partner also has their own allowances, meaning couples can potentially pass on up to £1million to direct descendants without paying a penny to HMRC.
However, six million couples cohabit and won’t benefit from any of this. Many don’t realise how costly this is until it is too late.
Mike Ambery, retirement savings director at insurer Standard Life, said the risk will grow with Labour plotting to slap IHT on unused defined contribution pension pots. “Surviving unmarried partners could end up with less pension income and a lower standard of living as a result.”
Married couples and civil partners can also pass assets between each other free of capital gains tax, giving them another incentive to make relationships official.
Getting wed or a civil partnership could be the best investment you make.
Consider trust planning. A trust removes assets from your estate so that they no longer belong to you, although you can still retain some control.
Gifts and money paid into a trust are treated as IHT-free if you live for seven years after making them.
So again, it pays to act while relatively young and in good health. You will need specialist advice from a financial planner and a solicitor. Ask them to set out their charges in advance.
Life insurance and trusts. Every year, thousands of estates pay IHT at 40% on the payouts from life insurance policies.
However, if you write a policy into trust, it will go directly to your beneficiaries, completely IHT-free.
It can also mean a speedier payout as your family won’t need to wait for probate, said AJ Bell expert Charlene Young. “IHT must normally be paid to HMRC within six months to avoid interest and must be settled before probate is granted. Insurance could make things easier for loved ones and prevent them from having to sell assets to help pay any IHT bill,” she added.
Insurance companies often send out a trust form when a policy is taken out. Despite this, only 6% of life policies are written in trust, says insurer Aegon. Check if you have signed a form and, if not, ask your provider for one.
Ms Young said any employer life insurance may also count as your estate unless it is in trust.
Insurance against IHT. If worried about an IHT bill, you can take out a specialy typeof life insurance to cover it. This is known as a whole-of-life policy, where you pay premiums for as long as you live. Helen Morrissey, at Hargreaves Lansdown, said: “How much you pay depends on factors such as age and health, but it could give peace of mind.
“Again, you have to write this into trust, otherwise it will fall into your estate and attract IHT itself, and you don’t have to wait for probate to get the cash.” Seek advice.
Write or update your will. An up-to-date will ensures your estate goes to those you want to benefit.
Without one, the state says who gets what, said Ms Young. “This could mean a higher IHT bill and if you have no surviving relatives, your wealth could pass to the Crown.” Unwed partners will not inherit.
Leave money to charity. Gifts made in your lifetime to UK-registered charities are free from IHT. This also applies to charity legacies you leave on death in your will, Ms Young said. “You can reduce the overall rate of IHT that applies on your taxable estate if you leave at least 10% of your net estate to charity. That way it will be taxed at a lower rate of 36% instead of 40%.”
You may not save much, but it lets you direct money towards causes close to your heart, rather than HMRC. If making large gifts, talk to a solicitor first.
Consider equity release. This allows older homeowners to raise a tax-free lump sum against their home’s value with no payments in their lifetime.
Interest rolls up and is repaid along with the capital from the proceeds of the property sale after death or going into care.
It will cut your potential IHT bill but also what you pass to loved ones. This is complex so talk to a lawyer and any family members affected.
