Inheritance Tax

Ways to Cut your IHT Bill

Inheritance tax (IHT) is one of the most unpopular methods used by the Government to extract money from us, but there are ways to cut your bill.

The first action to take is to update your will. IHT is not payable when an estate passes from one spouse to another, but if you want as much as possible to end up in the hands of your children and grandchildren, you need to ensure that you and your spouse make use of your combined individual nil-rate bands.

New rules announced in the Pre Budget Report mean that, even though couples have been able to us a nil-rate band discretionary will trust to achieve the same aim, married couples, or those in civil partnerships, can now make use of both their IHT allowances – a figure of £600,000 when combined.

Giving assets away is another route to a smaller IHT bill. Each year you can give away £3,000 free from IHT, or £6,000 if you did not give anything away during the previous tax year. A married couple giving for the first time could therefore hand over £12,000 to their children in one year.

Parents can give £5,000 to each of their children as a wedding or civil partnership gift – grandparents can give £2,500 and anyone else £1,000. Gifts of any size to charities or political parties are tax-free.

If a gift is regular, comes out of your income and does not affect your standard of living, any amount of money can be given away and ignored for IHT.

Another method to cut your IHT bill is to make further tax-free gifts, called potentially exempt transfers (PETs), but there is a catch – you have to survive for seven years after making the gift.

You can give away most assets including cash and shares, and they have to constitute an outright gift from which you can no longer benefit. You do need to keep an eye on capital gains tax though.

Whatever form of gift you decide to make, it is vital to keep an accurate record of them. The taxman has pledged to pay particular attention to gifts, especially PETs, between now and 31st March 2008.

A popular method of avoiding IHT, especially for the over-seventies, is to buy shares quoted on AIM. Most AIM shares become free from IHT once you have held them for two years, because they qualify for business property relief. It is not without risk – AIM shares a notoriously volatile – but they would have to drop in value by 40 per cent before or more before you lose the IHT benefits.

Two other ways to cut your IHT bill involve the land – buy a forest, or become a farmer.

Money invested in commercial forests becomes free of IHT after you have owned the forest for two years – like AIM shares, commercial forest qualify for business property relief.

Families can escape IHT by purchasing actively farmed land. If you farm the land yourself you will qualify for 100 per cent relief on the land after two years. The same is true if you sign a contract with a farmer to do the work for you, as long as you share in the profits and losses. However, if you let the land to a farmer you qualify for relied only after seven years.

However you decide to cut your IHT bill, it is imperative to get the best advice you can afford before you make any decisions. Investment in professional fees now could well avoid unnecessary tax bills in the future.