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When you pass away, you will no doubt want certainty that the entirety of your estate goes to your loved ones, with inheritance tax loopholes proving highly useful in securing this. Current laws state that any estate below the individual inheritance tax threshold of £325,000 is exempt from tax. However, 40% tax is applicable to any money above the threshold. This means that you could lose a large portion of your hard-earned assets.
In order to assist in reducing the percentage of your assets that the taxman will acquire upon your passing, this article will cover inheritance tax loopholes for 2022 and 2023 that you may find useful.
With highly complex rules surrounding inheritance tax, it can often seem like an uphill struggle to ensure that you are in control of your estate. Implementing these 8 inheritance tax loopholes grants you peace of mind that those held dearest to you will be looked after upon your passing.
Although we refer to them as loopholes, the correct names for the items covered in this article are reliefs and exemptions. However, for ease of understanding, we will refer to them here as inheritance tax loopholes.
Leave a gift to charity.
One commonly used loophole to reduce the rate of inheritance tax payable on your estate is to leave a donation to charity within your will. Anything left to charity is exempt from inheritance tax, and if you donate at least 10% of your total assets to a charity, your remaining assets will maintain a reduced tax rate of 36%, as opposed to the standard rate of 40%.
Furthermore, if the total charitable donation brings your estate to below the taxable threshold, inheritance tax may not be due at all.
Acceptable forms of donation include a fixed amount of money, an item, or what’s left over after other gifts have been distributed. Some people even choose to leave a percentage of their whole estate.
Britton and Time Solicitors are currently partnered with Chailey Heritage Foundation, a provider of education and care services for children and young people with complex neurodisabilities. Anyone choosing to leave a gift to Chailey Heritage Foundation could be eligible for a free will. This partnership presents an excellent opportunity to donate to a local service, aiming transform the lives and inspire achievement among children and young people with disabilities.
Alternatively, you can get advice on picking a charity through Give Well, who provide up-to-date lists of the most cost-effective, evidence-backed charities.
Annual gift exemption.
In England and Wales, you are able to give away gifts worth up to £3,000 tax-free, which could be the perfect loophole in inheritance tax laws to ensure that your beneficiaries receive a larger portion of your estate. You are also able to carry this price cap over to the following tax year, but only for one year.
This could therefore present the option to start offsetting your assets to loved ones prior to your passing, meaning that less of your estate will be taxable.
If your estate only marginally exceeds the inheritance tax threshold, you can repeatedly use your annual gift exemption over the years to reduce the overall size of your estate. This is a simple way to reduce inheritance tax liabilities that requires little to no planning.
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Place assets within a trust.
Another commonly used inheritance tax loophole is placing your assets within a trust. Your estate will not include these assets and therefore they avoid inheritance tax. Trusts are a great way to leave behind part of your estate to somebody who is too young to handle their affairs. An ‘interest in possession’ trust is a further option that allows for you to take income from the assets whilst avoiding inheritance tax.
It’s important you take advice if considering creating a trust as they can actually increase your tax liabilities if set up incorrectly.
Remember...
Any income gained from assets within an ‘interest in possession’ trust is liable to income tax.
Load your pension with cash.
You can save a maximum amount of just over £1m in a pension. Furthermore, you can pass on any money saved in your pension within this limit, free from inheritance tax. This is done through completing a beneficiary nomination form, and including it within your will.
This presents an opportunity, should you have various other sources of wealth, to leave your pension pot intact and spend your non-pension income in retirement.
You are also able to contribute to a family member’s pension. The recipient of this contribution would maintain their pension allowance of 100% of their earnings, or £3,600 if they have no earnings. This means that as long as their total pension contribution remains below this allowance, you can donate as much as you like. The pension holder can then claim a 20% tax rebate and could possibly claim the remaining tax through a self-assessment tax return.
Downsize and donate the cash.
A common practice taken to avoid paying inheritance tax is downsizing your property. Inheritance tax applies to assets you own at the time of your death, along with those given away in the 7 years prior. This could create an opportunity to downsize to a smaller property and give the difference to your chosen beneficiaries. However if you pass away within the 7 years following the donation, you’ll pay inheritance tax, but at a tapering rate.
For an individual with major assets such as business shares or second homes that present a separate income stream, this loophole affords the option to pass on a larger amount of money to your beneficiaries, tax-free.
It’s worth noting however, that you will be living off the proceeds of these sales. There will also likely be other non-inheritance tax related consequences to contend with when exploiting this loophole (such as capital gains tax on the sale of your investments).
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Invest in AIM shares.
Investing in any market can be a huge risk, but AIM shares present a particularly risky option. AIM (Alternative Investment Market) shares are often very small firms, with the potential of growing into greatly valuable companies. Current tax laws exempt any AIM shares you hold from inheritance tax, provided you still hold them at the time of your passing. However, this could change.
As with any financial product, the best way to mitigate any risk you face from investments is to speak to an independent financial advisor. If tax laws change, they may also be able to provide you with an alternative product.
Deed of variation.
This tax inheritance loophole doesn’t avoid paying inheritance tax on your own estate. Rather, it tries to prevent your beneficiaries from exceeding the inheritance tax threshold themselves.
By varying your will, your beneficiaries can essentially ‘opt out’ of receiving their share of your estate. The amount that the beneficiary would have inherited can then go to someone else, such as one of their children.
This is particularly helpful where your beneficiaries are elderly and have children of their own who could otherwise benefit from any gifts from your estate.
Write a will.
Writing a will enables you to choose who receives what from your estate and can help reduce any inheritance tax liabilities. In contrast, if you pass away without writing a will, government legislation will dictate your assets’ distribution.
Why contact our private client solicitors?
You only have one chance to plan your estate and failing to do so can lead to a large portion of your hard-earned assets going to the tax man.
For an initial consultation of £120 plus VAT, we can offer you:
- Unlimited time to go through your estate and assets and ask any questions you may have
- An overview of your inheritance tax situation and your available options
- A precise time and fee estimate for planning your estate
If you would like to speak to someone about estate planning, contact our solicitors on 020 3007 5500. Furthermore, visit our wills page for more information.
Disclaimer.
While we make every effort to ensure the information in our articles is correct at the time of writing, the law can quickly change. These inheritance tax loopholes may not be valid when it comes to planning your estate.
Britton and Time Limited are a law firm and regulated by the Solicitors Regulation Authority with registration number 644762. We are not regulated by the Financial Conduct Authority (FCA).
If financial advice is required, we will always direct you to an organisation approved by the FCA.
Is there a time limit of a agricultural qualification , not to be valid in clamping agricultural relief when inheriting a siblings farm. I am 68 & I obtained an agricultural cert (12 month full time course ,40 yrs ago , from dept of agriculture . Thank U. Mary
Hello Mary,
Thank you for your comment. The best thing to do is speak to our legal team to discuss the details further. You can call us on 020 3007 5500 or email us at [email protected]
Can you tell me if I will have to pay inheritance tax on a gift of two hundred and sixteen thousand pounds my mum and dad gave me to by a house
Hello Jackie, thank you for your question. Our client care team will reach out to you by email.
I’m surprised that you have not mentioned that if you write a will and leave your assets, including property ,to your children you get and extra £180.000 inheritance tax free ?
My mum has dementia, I have power of attorney, what is the legal procedure regarding her wealth, I.e finance and property please?
Hello David, thank you for your comment. Our client care team will reach out to you via email to discuss booking a consultation with our solicitors who specialise in Powers of Attorney.
Good Evening
My mother has dementia and in her will she has left her estate including her home to her 5 sons,could you please let me know what our options/entitlements or any other advice you could give us please.
Hello Brian, thank you for your comment. Our client care team will reach out to you via email to discuss booking in a consultation with our solicitors.