Dominic Browning, Managing Director
Posted by Dominic Browning
26/05/23
News, Resources, Insight and Opinion from Browning Financial Planning

How to minimise Inheritance Tax in your lifetime

Dominic Browning, Managing Director
Posted by Dominic Browning
26/05/23

Inheritance tax (IHT) could be considered as a voluntary tax.

What I mean is that with a bit of forward planning, it can be avoided (legally) or at least reduced.

One of the best things to minimise IHT is to invest in a pension. Whilst the primary aim of a pension is to provide income in retirement, it is important to know that the pension fund is generally exempt from IHT. If you die before 75, any withdrawals from the pension fund are tax-free to the person(s) nominated in your nomination form. If you die after 75, any withdrawals are payable to the nominated person(s) and taxed at their marginal rate(s). If there are any funds left when your nominated person dies, the funds are payable tax-free to their nominated person, if your nominated person is under 75 and taxed if they are over 75.

So if you die age 72, your wife can access your pension fund tax-free. If she dies at 82, your child could access the fund but pay income tax. If your child died aged 69, and there were still funds in the pension, their child would receive any pension income tax-free.

Unfortunately you can only claim tax-relief on pension contributions up to aged 75.

The maximum you can invest into a pension has increased from £40,000 per annum to £60,000 per annum. The cap on the amount the pension can be worth without incurring a penalty (the lifetime allowance) has been removed. Please, please, please make sure that you have an updated nomination in place.

You can gift £3000 per annum and this money is immediately out of your estate. You can gift unlimited amounts too but you need to live for 7 years before this money is outside your estate.

You can gift regular amounts out of normal expenditure and as long as this does not reduce the amount you can live on, it is immediately outside your estate.

For people gifting larger sums, who are concerned they may not survive 7 years, you can invest into an Inheritance Tax plan which uses Business Relief. This reduces the survival period from 7 to 2 years. This money is still yours and you can get it back, if for example you need to fund care fees.

You can gift money into trusts. There are solutions which will pay you a fixed income with an immedate IHT discount. Solutions which will put the growth outside the estate but you can get the capital back. Solutions whereby you lose access to the funds but maintain control how they are invested for your beneficiaries.

If you own rental property, you can give most of it to your children but keep 100% of the rental income. For example, if you transferred 90% of your rental property to your son/daughter, after 7 years, the 90% would be outside your estate, even though you continued to receive 100% of the income.

And lastly, you should have trust clauses in your Will, which kick in on first death, to maximise the protection and minimise the tax bill. By letting your children benefit from trusts after you have gone, rather than directly inheriting, you will not unwittingly increase their IHT problem when they die.

More News, Insight & Opinion
Will you outlive your retirement pot?

The most important question to be asked is ‘How long will you live?’  Continue

HMRC repaid record £198m on flexible pension withdrawals

A record £198m was repaid on flexible pension withdrawals for the tax year 2023/24, latest HMRC data shows. Continue

Lifetime ISAs - Why basic-rate tax-payers under 40 should consider them.

Lifetime ISAs were created to help people under 40 save for a house deposit. But are they any good as long-term savings if you do NOT buy a house? Continue

Life Boat Drills

If you have ever been on a cruise, you will be aware that the crew will carry out lifeboat drills either in harbour or shortly after leaving.  Continue

Why our fees are competitive

I was recently shown the pricelist of St James's Place, a FTSE100 financial advice firm. I nearly fell off my chair. Continue

Company Pension planning options

We regularly look at the company pension funds of prospective and existing clients. Continue