Reducing the inheritance tax burden

With increases in the inheritance tax (IHT) threshold failing to keep up with the speed of house price growth over the last 15-20 years, even in the current economic climate, people have continued to find that the value of their home has taken them over the threshold.

IHT is currently payable at 40% on assets exceeding £325,000 (2009/10), so if you own your own home and have some savings and other assets such as shares and securities, your estate could be liable. Early planning is therefore essential in order to minimise your liability to IHT. Your IHT planning strategies may include the following:

Making use of reliefs

There are a number of IHT reliefs available - perhaps most importantly relief on business and agricultural property, which effectively takes most of such property outside the IHT net. As always, there are detailed conditions, including a two-year minimum holding period, but business property will generally attract 100% or 50% relief depending upon the type of asset involved.

Exempt transfers

Transfers of assets between two spouses are generally exempt from IHT, regardless of whether they are made during a person's lifetime or on their death. In addition, the transferable nil-rate band may be transferable between spouses. This means that if the bulk of one spouse's estate passes on death to the survivor, the proportion of the nil-rate band unused on the first death goes to increase the total nil-rate band on the second death.

Other exempt transfers include:

• small gifts (not exceeding £250 per tax year) to any number of individuals
• annual transfers not exceeding £3,000 (any unused amount may be carried forward to enhance the following year's exemption)
• certain gifts in consideration of marriage or civil partnership
• normal expenditure out of income
• gifts to charities. 

Lifetime gifts

Introducing a programme of lifetime gifts can also significantly reduce the IHT liability on your estate. This has the advantage of allowing you to witness the benefits they bring to your family members, while also escaping IHT as long as you survive the gift by seven years and no longer continue to benefit from the gift yourself. A discount can also apply where lifetime gifts were made between three and seven years before death (note that the discount applies not to the gift but to the tax on the gift).

Utilising trusts

Trusts can be used to help maintain a degree of control over the assets being gifted, for example in the case of younger recipients. Life assurance policies can be written into trust in order that the proceeds will not form part of the estate on your death. Talk to us about using trusts to suit your planning needs.

Through a course of lifetime planning and action, you can reduce your liability to IHT. Please contact your usual Littlejohn tax adviser to find out more about strategies that could work for you; or contact IHT specialist Barry Luscombe bluscombe@littlejohnllp.com