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Cutting Inheritance Tax

When someone dies with assets worth more than the nil-rate band of £325,000, the excess estate is taxed at 40%.

As chancellor in the Labour government, Alistair Darling introduced a transferable allowance between husband and wife in 2007, so a deceased person’s £325,000 limit can be passed to a surviving spouse, allowing relief of £650,000 to be set against a family home.  However, the £325,000 threshold has not changed since April 2009 and will be frozen until April 2018, triggering mounting anger among hard-pressed families in the southeast, who are paying half of all the money raised.

Unsurprisingly, some homeowners have sought to protect their family home from the taxman by entering into complex schemes.

Patricia Mock, tax director at the accountancy firm Deloitte, said “HMRC now has some schemes sold by a few advisers, with the purpose of avoiding tax, in their sights”.

However, there are legitimate ways to reduce your IHT liability, the most straightforward and significant being to make sure you have a will, which will mean your share of the assets goes to your spouse so that both IHT nil-rate bands can be fully exploited.

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After that, you can give away money or property, and if you survive for a further seven years, there will be no IHT to pay.  However, you must not retain any interest or influence over the asset.  For example, you cannot give away your home and continue to live in it, unless you pay a commercial rent.

It is also possible to make a range of other financial gifts each year to remove assets from your estate.  These include as many small gifts of £250 as you choose.  Each year you can give away £3,000 with other gifts allowable on marriage.  Donations to charity are IHT-free, and if you give away 10% of your estate to a good cause, the IHT rate falls from 40% to 36%.

If you have high income, you can give away excess money, provided you can prove you have not cut your living standard as a result.

Some people use trusts to pass assets on, such as straight-forward will trusts, but these will not normally save you any IHT.

Sometimes it is possible to gain a financial advantage through complex arrangements include loan trusts, where you can make a loan to the trust but the investment growth earned on it goes to the trust’s beneficiaries and so lies outside the estate.


Some of these loan trusts may be caught under HMRC’s anti-avoidance measures.

Mock said: “I doubt any of the normal trusts set up by ordinary families will be caught.  It is complex arrangements designed to cut the tax bill that HMRC are after.”