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How to save on inheritance tax

Our money matters column from Paul Phillips at inheritance Wealth Management, who says everyone can benefit from financial advice especially in regards to inheritance tax.

Paul Phillips from Mollam Wealth Management

What is Inheritance Tax and how is it charged?

Inheritance Tax is currently charged at 40% of the value of your estate, over £325,000. But you can also claim an extra allowance, known as the Residence Nil Rate Band (RNRB), of up to £175,000 if you’re passing your residential property on to a direct descendant. A direct descendant is a child, grandchild or lineal descendant of the person who has died. You can claim the RNRB allowance as long as your total estate is less than £2 million.

This effectively means that a single person who owns their own home can pass on £500,000, free of IHT, while married couples and civil partners can pass on up to £1 million as transfers between spouses and civil partners are tax free.

Here are three ways that you can mitigate your Inheritance Tax bill and leave more to those you love.

Start giving money now

One of the easiest – and most pleasurable – ways to mitigate an IHT bill is to reduce the value of your estate by giving money or assets away. You could buy a grandchild their first car, pay for a family holiday, or even help out with a deposit on a first home.

How much can I give away?

Each tax year, you can give away up to £3,000 tax free, as well as make any number of small gifts up to £250 per person (provided you haven’t used another allowance on the same person). This is your annual gifting allowance. In addition, if your son or daughter is getting married, you can gift them £5,000, you can gift £2,500 to a grandchild or great-grandchild getting married and £1,000 to anybody else.

That’s going to buy a great honey moon and save some IHT later on.

The other good news is that if you didn’t use your £3,000 gifting allowance in the previous tax year, you can combine two years’ worth, and give away £6,000. If your civil partner or spouse does this too, that’s £12,000, but you’ll need to make the gifts before tax year-end on 5 April.

Make gifts from spare income

If you’ve got more income than you need to live on, you can also gift money on a more regular basis. You might want to help out with school or nursery fees, regular bills or a mortgage repayment.

For this to help mitigate your eventual IHT bill, you need to demonstrate to HMRC that you can afford these payments and still enjoy a comfortable standard of living. Always keep a record of these gifts – and let your loved ones know where it is or give them a copy.

Save more into your pension

Pensions aren’t just a great way to save for retirement. They can also be a very useful, tax-efficient planning tool. Since most pensions sit outside your estate, they’re not counted when the IHT bill is being calculated. You can pass them on to your beneficiaries, who will pay some income tax on the money when they withdraw it, but not the IHT rate of 40%.

If you die before you’re 75, your pension can be paid as a lump sum or regular income to any beneficiary, free from tax. If you die after age 75, your beneficiaries will only need to pay tax at their marginal rate on withdrawals. That could save them 20% if they’re basic rate taxpayers.

You can still access it if you need to while you’re alive. But if you don’t touch it, you can pass it on to your loved ones in a tax-efficient way.

The value of an investment with St James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

For friendly, local financial planning visit


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