I read in a recent report by IFA Promotion (IFAP) that the British waste around £9.3 billion a year by paying too much tax. Now I know that we must all pay tax to support society, but on the basis that Her Majesty’s Revenue and Customs (HMRC) aren’t shy in pursuing us for anything and everything they can get their hands on, I personally see no reason to voluntarily pay more than the law requires.

Between now and Christmas we are therefore going to bring you a number of tax tips to help you stop contributing to this avoidable surplus. Today, we’ll begin with Inheritance Tax

Inheritance Tax (IHT)

One of the worst cons of the lot is surely Inheritance Tax (IHT): you work all your life, paying taxes as you go, but then when you try to hand on the benefit to your family afterwards HMRC takes a huge chunk (potentially almost half!) of that hard work – your children’s rightful inheritance – away from you; in total HMRC takes £1.9 billion from us each year.

I don’t agree with IHT as you can perhaps tell, but it’s there and so it must get paid: however, there is no reason to pay more than the law requires! This post will therefore try to help you reduce the amount that is eventually taken from your estate.

Inheritance Tax has been described by one commentator as “a bill that arrives after you depart” because it is paid by your estate after your death. If you have assets (including but not limited to): your investments and savings; your home and car; your furniture and personal effects; the proceeds of your life insurance (unless it is written in trust) that exceed £312,000 (2008/2009) …then the rate of Inheritance Tax is 40% for everyone (that’s equivalent to the highest current rate for income tax).

The tax is paid by those that inherit, and is deducted from the estate on death, so Inheritance Tax is relevant whether you stand to gain an inheritance or you plan to leave one.

For more advice on avoiding this death duty, you may find this guide helpful:

Inheritance Tax (IHT) Planning & Advice

It covers such topics as:

  • What exactly is Inheritance Tax?
  • Gaining an inheritance
  • Top up your pension with your inheritance
  • Invest it for the future
  • Writing a will
  • Inheritance Tax planning
  • How an estate is distributed
  • Some questions to ask your IFA about Inheritance Tax (IHT) Planning

NRB Trusts

However, what it won’t tell you about is something called a Nil Rate Band (NRB) Trust; this is something that every property investor should know about.

In simple terms a NRB trust is a method by which you (the Grantor) can gift a portion of your combined estate to your heirs (thereby using your full IHT allowance) but allow your spouse to continue enjoying the benefit of it for the remainder of their life. While the asset technically belongs to the inheritor they must act as trustee for the beneficiary (your spouse) for the remainder of the beneficiary’s natural life.

A NRB Trust is most commonly used in cases where the combined estate is valued at more than the tax-free limit, and it effectively doubles that limit for a couple. Obviously if you have an investment property portfolio with any amount of equity in it, this is a strategy that you should consider.

You will need an accountant, perhaps even a tax consultant, to advise you on the detail and set this up for you but if you consider that 40% of £312,000 (i.e. what you could potentially save at today’s prices) is £124,800 then it’s well worth investing £50 or £100 in the conversation for the sake of your children!

So that’s my first tip, how to save more than £120,000; if you found it helpful then look out for more tips between now and Christmas. Tomorrow, I’ll be talking about Individual Savings Accounts (ISAs).

Feel free to forward a link to this post to your friends and colleagues: you may also wish to suggest that they sign up to our Free Newsletter using one of the boxes on this page to receive further free tax tips.

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