When someone dies, the money and property left to beneficiaries is subject to an inheritance tax. Yet, with some planning, anyone can learn how to avoid inheritance tax, or at least minimize the impact.
if you think your estate might have to pay Inheritance Tax, here are some simple things you can do to reduce the taxman’s cut.
Gifting assets Transfers of assets to younger relatives made seven years or more before death are not normally taxed. So anyone who has a buy-to-let property, for example, can put it in the name of one of their children, if they do not need the income from it to support their retirement, in enough time for the seven year exemption to apply. It is not usually possible to give your main home to a child to escape IHT if you plan to keep living in it, unless you pay the child a fair market rent.
Wealthy families have used Trusts to avoid tax – and particular taxes on death – for centuries.
It is possible for people of more modest means whose heirs would face a hefty Inheritance Tax charge to use them too.
One technique favoured by many big insurance firms are ‘loan Trusts’. These arrangements are not risk free and, of course, cost money to set up and run. Unless your resources are considerable – in the millions – such things are best left to those with considerable wealth.
Business Property Relief
Business property relief (BPR) can be very effective way to remove assets from your estate but still have full access to the funds if needed in the future. By investing into a BPR qualifying investment once the investment has been held for 2 years and as long as it is still held at death the assets will be excluded from your estate when assessing the Inheritance tax liability. Investing in BPR qualifying investments carries higher risks as it involves investing in unquoted companies or AIM listed companies; however there are many packaged solutions available where any investment is asset backed which considerably reduces the risk compared to investing in a company directly.
Writing a will
Writing a will is the one sure-fire way of making sure that your assets are distributed as you want them to be and not towards the taxman. If you die intestate (without a will) your estate will be divided up according to strict rules, which may mean the incurrence of otherwise avoidable inheritance tax.
Take out life insurance
A life insurance policy will not have an impact on the amount of inheritance tax levied against your estate but it will help your beneficiaries to pay any tax that is required. This could, for example, mean that your children could avoid having to sell a property to pay inheritance tax. In order to guarantee that your life insurance payment won’t add to your inheritance tax bill, you need to make sure that it is paid into a trust on your death so that it doesn’t become part of your estate.
Change your domicile
Unlike any other tax, UK Inheritance Tax (IHT) follows you around the world, regardless of where you may reside. That’s because it is based on your domicile, not residence. So you need to change your domicile in order to shrug off IHT.
If you really have made a permanent move to a new country, and intend to stay there for the foreseeable future without ever intending to return to live in the UK, then there is a very good chance that you have changed your domicile. Most accountants and lawyers suck their teeth and tell you that it is very difficult to change your domicile; I don’t entirely agree.
Whilst it can be difficult, it is certainly not impossible. We use a Domicile Determination Questionnaire which we have developed over the years to document all of the relevant facts about one’s domicile. From that we develop a thorough affidavit documenting the intentions, facts, reasoning and so on to support the new domicile of choice claim. This document arms your heirs with important evidence to resist any IHT claims. Your estate will remain liable to IHT on UK assets in your estate, but you can avoid that by wrapping those UK assets into a suitable offshore structure (once you have changed your domicile).