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Save for your family's future with the benefit of 40% Inheritance Tax Relief

Your accumulated wealth – properties, savings and investments – has already been taxed at least once.  Hence most of us like to minimise a second or third hit of taxation on death, especially as Inheritance Tax (IHT) is levied at an onerous rate of 40% above a person’s tax free allowance (currently £325,000).  Timely planning is paramount as the government has closed the door to most “last minute” IHT avoidance schemes.  However there are still plenty of opportunities to reduce ones’ IHT liability. The following is a great way to save some IHT.

Most people are aware of the ‘annual exemption’ which allows IHT free gifts of up to £3,000 per year (with no need to survive the gift/s by seven or more years).  There is an even more valuable exemption which is much less known and grossly underused – the so-called “gifts of excess income exemption”.  Basically the exemption allows a person to give away an unlimited amount of money and the monies gifted will immediately avoid IHT (again no need to survive for seven years) provided such monies constitute excess income.  The rules are strict and expert advice should be sought to get it right and correctly documented and reported to HMRC. 

For example, Fred and Pauline have an income of £80,000 from pensions and investments per year.  Their outgoings are £50,000 per year.  So year by year their savings will grow by £30,000.  If they do nothing for the next ten years their savings will have increased by £300,000 (plus any further growth on this money) and thereby will have created a potential IHT liability of £120,000 (or more) on that sum alone.  If instead, they had given away £30,000 each year this would have passed tax free onto children or grandchildren and thereby saved at least £120,000 worth of IHT.

As advisers we are aware that there is often a reluctance to make lifetime gifts for the following reasons:

1. A fear that too much may be given away i.e. keeping enough back for a rainy day.  The excess income exemption does not dip into existing savings (just stops them from building up) and allows the decision to be reviewed on a regular (at least yearly) basis.  Also not all excess needs to be given away so the amount can vary and be adjusted according to needs.

2. A worry about loss of control of the monies gifted and concern that this may be wasted or fall into the wrong hands (say to a divorcing spouse of a child).  This can be avoided by combining the excess income exemption with a simple Trust.  Basically a Trust can be set up during your lifetime with a nominal value (e.g. a stamp) and year by year the excess income is paid into the Trust.  The Trust could, for example, be for the benefit of grandchildren (say their education or deposit on a house).  You can be the Trustees and as such retain 100% control over any spending of Trust funds. 

The combination of the income exemption with a simple Trust provides a fantastic saving opportunity for future generations and, best of all, it can save 40% IHT for your estate!  If you are interested in utilising the Excess Income Exemption with or without a Trust or in any other Inheritance Tax or Trust planning then speak with one of our experts in this area by contacting us now.