Inheritance tax (IHT) is one of the UK’s most contentious taxes – many people may receive a large, unexpected bill at an already difficult time when they are grieving the loss of a family member. The number of people who are liable for IHT is also on the rise each year: HMRC have just announced that they collected a record £7.5bn in IHT in the 2023/24 financial year. This is because although values of property and other assets have risen sharply in recent years, since 2009 the standard threshold known as the Nil Rate Band for IHT has remained unchanged at £325,000 with tax charged at an eye watering 40% on anything above this –assuming the Residential Nil Rate Band of £175,000 is not available. By 2033, it is estimated that 13% of the UK population will incur IHT on the value of our estates left to loved ones when we pass away. IHT also appears unlikely to disappear any time soon: while the Conservative party have considered reforming IHT, Labour have promised to keep it in place if they succeed at the next election.

Fortunately, there are a variety of solutions you can use to help mitigate the effects of IHT on your estate. Below is a brief overview of some of them:

Use an IHT Portfolio Service: One solution that may reduce the amount of tax payable on your estate is to use an ‘Inheritance Tax Portfolio’. This is a portfolio of shares in companies listed on stock exchanges such as AIM or Aquis Exchange PLC Growth Market: these  companies are usually considered higher risk than those listed on the London Stock Exchange due to less stringent listing requirements; they also tend to be smaller or an at earlier stage in their business lifecycle. This makes them higher risk. In return for this risk, if you have held qualifying investments for two years at the time you pass away, you can potentially use a tax relief known as ‘Business Relief’ to exclude up to 100% of the value of those investments from the value of your taxable estate. Business Relief is a government initiative that has been around since the 1970s and more recently is designed to enable the transfer of businesses from one generation to the next as well as to encourage investment in unquoted UK companies in return for this exclusion from IHT.

Because of the higher risk nature of investments that qualify for Business Relief, it is essential to use a professional who specialises in IHT investing and is skilled at conducting sound due diligence on any companies that may form part of an IHT portfolio. The AIM market has been weak over the last couple of years, as interest rates have risen, combined with the impact of the various geo-political issues that have arisen during this time. Valuations of smaller company shares look very attractive and therefore, arguably, now could be a good time to invest.

Certainly, many corporate or private equity buyers agree with this as there have been over 100 takeover attempts on AIM over the last 18 months or so, illustrating the value on offer. The key, as always, is careful stock selection and ongoing monitoring of these choices thereafter.

Gift away assets: Gifting assets such as cash, securities or property to your family or loved ones during your lifetime is one of the simplest methods of reducing your liability for IHT. The snag to this is that most gifts made during your lifetime are only fully free of any IHT liability if you survive seven years after making the gift – and for this reason are called ‘potentially exempt transfers’. If you pass away prior to seven complete years elapsing these gifts may be included back in your estate, though from year three you will benefit from a sliding scale known as ‘taper relief’ which effectively reduces the liability of the gift over time. 

Individuals can also give away £3,000 worth of gifts each tax year without them being added to the value of your estate. If you haven’t used your annual exemption from last tax year, you can also carry it forward and use it in the subsequent year. 

Other potentially exempt gifts include wedding or civil ceremony gifts, normal gifts out of surplus income and payments to help with financial dependents’ living costs.

Life insurance: There is the option to take out a life insurance policy that can provide a sum assured to contribute towards the expected IHT liability, though often this is discounted as an option as people prefer to avoid the regular premiums due to cashflow restrictions; life polices can also be expensive if established later in life.

Create a trust: It is also possible to set up a trust to indirectly give away assets – this comes with the advantage that assets held on trust for seven years prior to death are excluded from your taxable estate for IHT but the disadvantage of losing control of your assets. This can often be a complex area of planning, so it is important to seek professional advice if this is a route you wish to consider.

Leave some money to charity: If you leave 10% or more of the net value of your estate to a registered charity in your Will, your estate would be able to pay IHT at a reduced rate of 36% instead of the normal 40%.

Other estate planning and IHT planning considerations:

Spousal exemptions: While IHT is payable at a rate of 40% on assets in excess of the Nil Rate Band and Residential Nil Rate Band (where appropriate), totalling £325,000 or £500,000 (if Residential Nil Rate Band is available) for a single person, for married couples a ‘spousal exemption’ from IHT applies. This means any allowances can be transferred to their surviving partner on death, bringing their combined exemption allowance up to £1,000,000 noting this assumes their allowances were not used in the Will via gifts or the establishment of a trust. It is important to note that this relief does not apply to cohabiting couples regardless of how long you have lived together, so getting married to a long-term partner could offer one of the easiest forms of protection from IHT.

Keep an up-to-date Will and Lasting Power of Attorney (LPA): Whatever route(s) you opt for to mitigate IHT, it is vital to put in place and keep up to date a valid Will and Lasting Power of Attorney, which should form the foundation of an IHT mitigation strategy. 

Lastly, I would stress the importance of taking professional advice as soon as possible to ascertain if your estate might be liable to pay IHT. Early planning can alleviate much of the stress involved and maximise the options available to you. While each option has advantages and disadvantages, you should bear in mind that if your estate is liable to IHT then without any action your beneficiaries are likely to have a more substantial tax bill to settle the liability than if you didn’t take one of the five actions we detail above.

The information provided in this article is of a general nature and it is not a substitute for specific advice with regard to your own circumstances. Please remember that the value of your investments can go down as well as up and you may not get back your original investment. All views expressed are those of the author and should not be considered a recommendation or solicitation to buy or sell any products or securities. Investments in the Inheritance Tax Portfolio Service are in high-risk securities and are therefore likely to have high levels of volatility with a significant risk of losing more money than the IHT saving.

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