The freezing of the inheritance tax allowance at £325,000 for the next few years is very different to the Conservative manifesto promise to raise the allowance to £1 million. This will result in thousands more estates being dragged into paying the tax.
So this week, I am taking a look at some of the less frequently used inheritance tax-saving techniques.
The basic annual gifting allowance of £3,000 is well known, as is the individual £250 gifting allowance. These exemptions are useful if used frequently, as long as they are correctly documented. They do not, however, make a huge difference to the percentage of tax payable for larger estates.
Less frequently used, but particularly effective, is the normal expenditure out of surplus income exemption. This is where there is the intention to make a series of gifts and the gifts are made out of surplus income.
In theory, there is no limit to the size of these gifts and each gift is not required to be the same size as the last. This valuable allowance means that the value of each of the gifts is immediately outside of the estate for inheritance tax purposes, so there is no need for the donor to survive for more than seven years for the gift to be effective in saving 40 per cent tax.
Used alongside flexible drawdown, this technique can be used to move vast amounts of money, inheritance tax-free, to the next generation, or into trust in a very short space of time. This regular payment exemption can also be successfully used with payments into insurance trusts.
For estates where there is no surplus income, but surplus capital, different opportunities are available, including a discounted gift trust, which allows for an income to be taken for the benefit of the donor for the rest of their life. The remaining capital is held in trust for the beneficiaries. There is an immediate potential tax saving with these trusts, known as the discount, so even if the beneficiary dies unexpectedly, shortly after setting up the trust, there can still be significant savings. The capital is totally exempt from inheritance tax after seven years. It is crucial that these trusts are set up correctly to ensure HMRC will allow the discount.
Where there is limited life expectancy of less than seven years, investment schemes which take advantage of business property relief rules allow assets to escape inheritance tax after just two years.
David Hill is a Chartered Financial Planner and Independent Financial Adviser at Hills Financial Planning, 15 Agnew Street, and Larne. He can be contacted on 028 28276814 or by email: email@example.com