This move – to increase the time from seven years to ten – was initially rumoured in the run-up to last Autumn’s budget, but failed to materialise. Now it is reportedly under consideration again for the Spring budget.
The motivation to do this has been increased not only by suggestions that the Government will change the rules, but also because more people are now paying inheritance tax (IHT). This is due to the threshold having been frozen since 2009 while property prices have gone up by over 80 per cent. Here is what you need to know about IHT and legal ways to avoid or minimise it.
IHT is usually charged at 40 per cent on the value of the estate above the “nil-rate” band of £325,000. There is an extra £175,000 allowance for anyone leaving their main home to direct descendants (children, stepchildren and grandchildren) if the estate is worth less than £2 million.
How to minimise IHT
These are financial products that allow investment in companies that qualify for Business Relief, which reduces a person’s IHT bill (provided the investment was made two years before they die). You can do this through a financial advisor or speak directly to a company that offers this product, such as Octopus Investments.
The downside is this type of investment is risky, as the businesses involved tend to be smaller unlisted companies. So you can lose money, however for someone with an estate that is certain to trigger IHT they may prefer the odds of losing, say, 20 per cent rather than the certainty of paying 40 per cent tax.
Invest in the Aim stock market
The downside of this is the same as the ITS products in that you will be investing in early stage businesses, with a higher than average chance of going bust. But also some companies listed here go on to be extremely profitable. This perk is not available if you hold the shares through a fund, and not all Aim shares are eligible.
Give away surplus income
Adam Johnson, a financial advisor who founded New Forest Wealth Management said the reason why it’s not better known is because it’s very fiddly and involves a lot of admin. For some of his clients he gets them to record the gifts every year on a form. “You can’t leave on a tin of baked beans a day and say the money is surplus” adds Johnson, who says people have to fill in their outgoings and expenditure in a process not dissimilar to a mortgage application.
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