Rachel Reeves is said to be considering an extension to the number of years that need to pass to avoid inheritance tax, making it harder for money to passed on to kids or other beneficiaries free of tax.
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.
Lawyers and accountants have reported a surge in clients either making gifts now in anticipation of the rules changing, or enquiring about other ways to pass wealth on after a person dies.
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.
Under the current scheme, you can give away as much money as you like, inheritance-tax free, as long as you live seven years after doing so. This seven-year rule is commonly used by parents and grandparents to gift money to children and grandchildren.
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
The ‘annual exemption’ allows you to give away £3,000 each year. This can go to one person or be split between many. Unused exemption can be carried forward once to the next tax year, but after then it’s lost.
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.
Business Relief was designed to ensure that following the death of a business owner, a family-owned business wouldn’t have to be sold just to pay an inheritance tax bill. But IHT benefits were also made available to private investors who invest in a qualifying business. In this way it is increasingly being used as an option for people looking to reduce their inheritance tax charge. A bonus is you can make money from the investment in your lifetime (in the form of dividends) but leave it to, say, a child in your will, IHT-free.
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 Alternative Investment Market (Aim) is a sub-market of the London Stock Exchange. Set up about 30 years ago, it a home for smaller companies or those who prefer a less strictly regulated environment than the main market. The online fashion brand Asos and Hotel Chocolat started off on Aim. As a way of encouraging wealthier people to invest in British businesses the tax man looks favourably on money held in companies listed on this stock market. If you leave money to a beneficiary listed this way – and you live two years after you bought the shares – then it’s IHT-free, also under the Business Relief scheme. However, in the last Budget, it was announced this would be changed in the future. From April 2026 those who inherit the shares will be taxed at 20 per cent (rather than the usual rate of 40 per cent for inheritance tax).
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
This is not a very well known way of giving money tax-free. It allows people to set up regular gifts from your extra income without limit, provided they can show that they do not reduce your standard of living. “The best way to evidence this is to keep records of your regular income and show that you’re not having to cut back on your normal spending to make them,” says Laura Suter of the investment portal A J Bell. “The records will also be needed when it comes to administering your estate and claiming the exemption.”
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.
Read More Details
Finally We wish PressBee provided you with enough information of ( I’m worried inheritance tax ‘seven-year gift’ rules may change – what can I do )
Also on site :
- Kremlin comments on possible US strike on Iran
- Nazi symbols prevalent in Ukrainian military – Le Monde
- Former NBA Player and 'Survivor' Alum Opens Up About Heart Transplant