Inheritance Tax Update – get IHT savvy now!

Protecting wealth when alive and also on death is highly important to most business owners.

Dental practice owners and medical consultants are typically fortunate in their wealth position so whilst this brings many benefits in exchange for your hard earned work, it means some thought needs to be put into making sure as much of your wealth as possible is protected and passed onto your loved ones.

The IHT allowance

The current IHT threshold is £325,000. Any value to the estate upon death above this threshold could be subject to 40% tax. But of course, you don’t want to limit your time on this planet by not growing your wealth for fear of IHT either! In this case, a balance is needed and here are a couple of solutions to help.

IHT and gifting money

Using your annual IHT exemption of £3,000 is an option to pass money to your children and see them benefit whilst you are still alive. Depending on the size of your family will depend how effective this method of tax planning is for you though. The difficulty here as well is that if you die within seven years of making the transfer then you could fall liable to up to40% tax anyway.

IHT and gifting money from your income

The plot thickens! If transfers to your children are made on a regular, structured basis then the funds are in fact considered exponential to your own requirements and therefore as they are not affecting your standard of living they have an exemption from IHT. “Regular” really does need to be “regular”, and “structured” could include a document detailing the terms; frequency of payments, amount and duration etc. making the process somewhat official. This strategy, combined with using your annual allowance to gift lump sums can work very well in providing your children with parts of your wealth on a monthly or perhaps quarterly basis whilst reducing the risk of paying large sums of IHT upon death.

Gifting money from your income into a pension

A further tax-planning tool would be to use a registered pension to save money for your children’s future. The limit for deposits into a pension is £2,880 per child, per year (and can be set up from birth) so depending on the size of your family, the £3,000 annual allowance could cover all (if 1 child) or some of this maximum pension allowance and the rest topped up with regular “gifts from income” if necessary, resulting in additional income tax benefits from using a pension as a savings vehicle.

Using the marriage allowance for IHT planning

Finally on IHT, if one of your children is getting married there is an additional exception available. Each parent can gift £5,000 to the happy couple and receive IHT relief. If you are a grandparent you can gift up to £2,500 and if you are just a generous friend you can gift up to £1,000 and receive the tax relief as well. These exemptions are in addition to the £3,000 annual allowance. Better start marrying your children off early! Related article: Leave your wealth in the right hands and avoid unnecessary IHT