Five ways to cut IHT bills as rumoured tax cut absent from Autumn Statement

Despite widespread rumours the Autumn Statement would contain a cut to inheritance tax, the Chancellor chose instead to save his fiscal firepower for a reduction in National Insurance. It's possible the government may return to this issue ahead of the election next year, though the fiscal room for manoeuvre doesn't look encouraging. Savers and investors can take matters into their own hands though. Laith Khalaf, head of investment analysis at AJ Bell looks at the way individuals can legitimatelyprotect their assets from IHT:

"Taxes don't generally win popularity contests, but if there is one that gets people's heckles up, inheritance tax (IHT) is probably it. Only around one in twenty five deaths result in an IHT liability, but at a rate of 40%, it can really eat into the money you leave to your heirs if you fall foul of it, and many people clearly don't like the idea of paying such a heavy tithe on assets passed down the generations. The fact the Treasury has already collected a record-breaking £4 billion from IHT in the first half of this fiscal year simply serves to intensify the spotlight on this area.

"Part of the reason for the large government tax haul is the tax-free allowance has been frozen for 14 years. The nil rate band is the amount that can be passed down the generations with no tax to pay, and currently sits at £325,000 per person. This £325k nil-rate band has been frozen since 2009, and if it had been uprated in line with inflation all that time, it would be over £500,000 from April next year. That long IHT freeze means estates are potentially liable to an extra £70,000 of tax. Granted the extra Residence Nil Rate Band was introduced in 2017, which now provides an additional £175,000 of relief from IHT per person for properties passed on to a direct descendant, provided the estate in total is worth less than £2 million. But the mammoth tax receipts don't lie, and show that Inheritance Tax is on the rise.

"There are, however, legitimate steps you can take to mitigate IHT, or potentially avoid paying it all together. However you choose to deal with the question of inheritance tax, the most important thing is to make a plan in good time. It can be a difficult subject to bring up, particularly for those who stand to be beneficiaries, so if you're in the fortunate position of having a large pool of assets to pass on, it's probably a good idea to start the conversation yourself."

Five ways to avoid Inheritance Tax

Gifting

Gifting is probably the simplest way to pass your assets on to your children and grandchildren without paying IHT. However, if you die within seven years of making a gift, tax will be payable on a sliding scale. There are some notable exemptions to this seven year rule, however. In particular, everyone can gift up to £3,000 of their assets to beneficiaries each tax year without that sum becoming liable to IHT, no matter when they die. A family wedding could be another occasion to consider passing some money on. Gifts of up to £5,000 to children made in advance of a wedding are protected from IHT, irrespective of when you die, and up to £2,500 for grandchildren. You are also allowed to make gifts from your surplus income, provided they are regular and documented. The rules around this form of gifting are complex, so it's probably a good idea to seek the services of a qualified financial adviser if you are going down this route.

Pensions

A SIPP (Self Invested Personal Pension) could also be a useful tool to pass wealth onto younger generations, though its purpose first and foremost is to provide you with a retirement income. You can nominate beneficiaries for your SIPP in the event of your death, which must be officially submitted to your pension provider, and IHT is not generally payable. If you die after the age of 75 though, your beneficiaries will need to pay income tax on money they take out of the pension, which could be 20%, 40% or 45%, depending on whether they are a basic, higher, or additional rate taxpayer. The amount of income tax paid can be mitigated by withdrawing money from the SIPP gradually. Non-taxpayers, such as children, would pay no tax on withdrawals up to the annual tax-free income allowance, currently set at £12,570.

Trusts

Setting up a trust to hold your assets is another option to consider, though this is a complex area, which definitely requires a financial adviser to walk you through it. The benefit is that whoever you appoint as the trustee can control the assets rather than being passed onto the beneficiaries right away. This might be useful if you are concerned about gifting assets to a loved one who is perhaps not renowned for their financial prudence, or perhaps to young grandchildren. Trusts can be expensive to run and subject to tax charges, which together with their complexity generally makes them worthwhile in only a few circumstances.

The AIM market

Investing in some AIM shares also comes with IHT benefits, because many stocks on London's junior market qualify for Business Property Relief. You must hold the shares for a minimum of two years before you are eligible for this IHT exemption, and not all AIM shares qualify. HMRC has published the rules which determine which sort of businesses qualify for this relief, but they don't publish a definitive list unfortunately. So there is some risk of misinterpreting the rules here. You also shouldn't invest in a company simply for tax purposes. If you make a poor investment it can end up costing you an awful lot more than 40% Inheritance Tax. For those who don't wish to select shares themselves, there are some professionally managed AIM portfolios available on the market, though they do tend to be quite expensive in terms of charges.

Insurance

A final option to consider is setting up an insurance policy which pays out when you die, and thereby covers any inheritance tax liability. The policy should be written in trust, so the payout doesn't fall into your estate and therefore be subjected to IHT itself. Again, the guidance of a financial adviser should be sought here. This route offers you peace of mind that your beneficiaries won't struggle with a IHT bill when you die, but you are effectively paying at least part of that bill while you are alive through your monthly premiums, which can be substantial. If you die quite young, you probably get a good deal from the insurance policy, but if you live to a ripe old age, you may not.