Reducing your inheritance tax through investment

What is inheritance tax (IHT) and when does it apply?

When someone passes away, the first £325,000 of their estate is considered to be tax free, meaning that it’s charged at a nil rate.

After that, inheritance tax (IHT) is a 40% tax levied on the value of the estate above £325,000.

The nil rate band has been set at £325,000 since 2009 and will be frozen at this level until at least 2026,

There is also a further Residence Nil Rate Band, introduced in 2017. This provides a further exempt amount of up to £175,000, against the value of your property. The idea being to ease the IHT burden for most families, making it easier to pass on your family home to your loved ones without incurring a tax charge.

It’s important to be aware that the Residence Nil-Rate band could be reduced if your estate value exceeds £2 million.

The nil-rate bands can be transferred between spouses on death, so a total nil-rate band of up to £1 million could be available on second death, depending on the value of your estate and property value.

How does IHT work?

Normally, you don’t pay tax if you leave everything to your spouse; or to a beneficiary who’s exempt, such as a charity.

If you gift your home to your children or grandchildren, you can also benefit from the Residence Nil Rate Band, making some or all of your property value exempt.  There’s also the possibility of making a transfer or gift that is potentially exempt from tax, providing you survive 7 years from the date of the gift.

You can give away up to £3,000 every tax year, which is a gift known as an Annual Exemption. You can carry this amount forward if you don’t use it, so it can be used in the next tax year.  

There’s also the Small Gifts Exemption, which means you can give as much as £250 to as many people as you want, every tax year, as long as no other exemption has been used towards a gift to that individual.

You might also want to consider Gifts out of Income: if your income regularly exceeds your expenditure, you can give away what’s left over. There has to be evidence that you intend a settled pattern of giving, as well as the gifts coming from your excess post-tax income. You can either show that your capital isn’t being depleted or provide proof of your annual income and expenditure.

One certain way to lower your IHT burden is, of course, to spend your money – while still making sure you have everything you need for a happy, healthy, and lengthy retirement, that is…

For example, you could spend on a holiday for your whole family. However, you do need to make sure you don’t spend on something that would be considered an asset in your estate, such as a car, as that would still be counted towards your total IHT liability.

If you want to reduce your IHT burden, it’s best to talk to someone who knows their way around the subject and can help you plan. Have a look at this article which is a useful summary of what you need to consider and a very helpful article by our financial planning expert, Jonathan McDowall.

Here at Henderson Loggie Financial Planning, we have a wealth of experience in helping our clients reduce Inheritance Tax. If exemptions and gifting to your family don’t go far enough for you, it’s good to know that there are other actions you take to ensure more of your assets can pass on to your family.

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Reduce your IHT through investments

Investment bond held in trust

A trust is created when you – the settlor – give money or assets to a trust. Trustees are appointed alongside you, to look after the trust assets, for the benefit of those you want to provide for – your beneficiaries. Some trusts can offer access to the settlor; others can’t and would be used to make an outright gift.

Here’s our colleague, Lucy, sharing her knowledge on trusts and how they can benefit the people you love when you’re no longer here.

Why use an investment bond within trusts? They’re very tax-efficient, and they don’t produce any income or capital gains within the trust, whilst invested, so there’s no ongoing tax to be declared. There’s also a wide range of investment options available, so you can find one that suits your needs.

In short, investment bonds held in trust give you the potential to make gifts and reduce IHT. The trustees can control who receives the benefits of the trust and when.  You can also be confident that your investment will grow free of IHT within the trust.

Business relief investments

Business relief investments are investments that can qualify for IHT relief, and therefore save you IHT. There are several benefits: if you prefer to watch rather than read, here’s a link to our comprehensive webinar on using business relief to mitigate IHT, which gives you an overview of how it works.

Essentially, you can invest in a wide range of assets, and, in only 2 years, they become IHT exempt.

For example, you could choose to buy AIM shares – that’s the Alternative Investment Market, the London Stock Exchange’s growth market, sometimes known as London’s junior market.

Originally formed 20 years ago to help smaller, more entrepreneurial companies raise capital to help them scale up their businesses, it now involves more than 1,000 companies and is often viewed as the most successful growth market internationally.

There are also other investments available that can qualify for Business Relief, which invest in areas such as solar or wind energy.

Here’s our financial planning expert, Jonathan McDowall, discussing the range of investments that qualify for business relief to help you reduce your IHT burden.

Next steps

Here at Henderson Loggie Financial Planning, we work hard to understand exactly what you need, and then we give you the advice that’s just right for you, so that you can achieve your goals.

If you’re concerned that you don’t have the future of your assets securely in hand, talk to one of our friendly, professional advisers. We know all about the best ways to make certain that everything you’ve worked so hard for remains in your loved ones’ hands when you’re no longer around to care for them. Get in touch and let’s make it happen.