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More people caught by inheritance tax: how to avoid death duty

There has been an increase in the number of people caught by inheritance tax after the death of a loved one. Fortunately, there are easy ways individuals can reduce the bill before they die.


by Michelle McGagh on Feb 15, 2013 at 11:17

More people caught by inheritance tax: how to avoid death duty

The number of people facing an inheritance tax (IHT) bill increased by 3,000 in the last tax year, with 20,000 'estates' - that's the money and assets left by a person when they die - now eligible to pay the 'death tax'.

The number of estates paying IHT in 2011/12 stood at 20,000, up from 17,000 in 2010/11. Each individual has an IHT allowance of £325,000, and £650,000 for couples; estates under this amount are not liable to IHT but estates over this amount are liable for a 40% tax on any value in excess of the threshold.

It is likely that thousands more estates will have to pay the tax as the government has just announced it will freeze the IHT threshold for the next three years in order to pay for care reforms. This rules out a 1% increase in the threshold to £329,000 announced by the chancellor in December’s Autumn Statement.

Having an IHT problem is something that most younger people can only dream about. However, the long-term rise in property values means that IHT is no longer an issue for the very wealthy.

For those who are worried their estate will exceed the threshold, plans to use generous allowances to reduce the value should be used now, said Sean McCann, personal finance specialist at NFU Mutual.

‘It is tempting to focus on annual exemptions such as investing in tax-efficient ISA accounts. However, there should be an equal amount of time and thought given to the potential 40% IHT bill loved ones could face,’ he said.

McCann urged those with larger estates to make the most of IHT tax allowances before April. In particular, he mentions the ability to gift thousands of pounds each year to steadily reduce an estate.

If you gave away a large sum of money to a family member, maybe as a deposit for a house, you would have to live for seven years after you have given the gift in order for it to fall outside of your estate for IHT purposes – these gifts are known as potentially exempt transfers.

However, you are also given annual allowances that can reduce the estate. Each year you can gift £3,000 free from IHT, and if you haven’t used last year’s allowance you can use that too, totalling £6,000. On 6 April you will get another £3,000 allowance – meaning you could gift £9,000 IHT free this year.

If a couple both give away £9,000 over the next few weeks, reducing their estate by £18,000, it would save £7,200 in IHT on death.

‘One little-known exemption from IHT is the ability to make gifts out of normal expenditure. If you’re earning more than you spend, you’re likely to be steadily increasing your wealth and potentially creating a future IHT problem,’ said McCann.

‘You can make regular gifts from your excess income, so long as it doesn’t impact on your normal standard of living. It’s a handy way of giving loved ones a regular financial lift and will help to reduce any tax bill you leave on your estate.’

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36 comments so far. Why not have your say?

Dislexic Landlord

Feb 15, 2013 at 14:51

Ive looked at this issue time and time again

and if your single the only way of avoiding IHT is to give assets away

Being a Landlord giveing and asset away I also give away my Income

They have you by the short and curles

If any one could give advice to a Landlord im ready to listen

I think its only 2% of the uk population who pay IHT so you can understand why its not really political enough to change the rules

Its a disgrace loseing 40% it used to be a rich mans tax

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Anonymous 1 needed this 'off the record'

Feb 15, 2013 at 15:14

Pick a charity, or spend more. If you hate the thought of paying tax, charity is the way to go. Taxes support the environment that generates the returns on investment, well that's the theory. So in theory, you should be at least a liitle bit relaxed about paying them. If you feel the government could use the tax take better, you need to step in and remove the possibility of them wasting your lifes work. If you think the tax you might pay will be squandered on scroungers, or poured into a bottomless Quango pit, leave your esate to cancer research or something that YOU believe in. Spending more is obviously a good idea too.

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Maxwell Gower

Feb 15, 2013 at 15:22

Pointless article. The major IHT issue for most people is the value of their own residence, which is difficult to address, and which the author simply ignores. The rest of what he talks about is tinkering round the edges.

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Jerry Jones

Feb 15, 2013 at 15:43

Maybe use a foundation, perhaps offshore?

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Jerry Jones

Feb 15, 2013 at 15:49

Or, to expand, how about mortgaging the investment properties to reduce equity and place the proceeds of the remortgage into a discretionary trust, with beneficiaries chosen by you? I think you can still enjoy the income. In fact, if the investment props are not mortgaged, transfer them gradually into a trust, being careful to avoid CGT as far as possible if that creates a gain.

You could also transfer your own home into a trust, which people often use for asset protection to protect it from being claimed for care home fees. You'd need to spend on advice and lawyers to set it up, but you may feel it's worth it.

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Company director

Feb 15, 2013 at 16:19

Get an offset mortgage and use the equity in your property to have fun and be generous with it. You can't take it with you

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Feb 15, 2013 at 16:22

Careful consideration is needed especially with property assets. Your sons or daughters liability to pay IHT may be avoided if a company could be set up with the property within the company and the sons and daughters as directors.

Good legal advice is needed as there are always complications.

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Anonymous 2 needed this 'off the record'

Feb 15, 2013 at 16:34

Many shares on the AIM market are exempt if held for 2 years when you die. The company must trade in the uk - no property, no share trading companies.

The shares must not be traded on a 'recognised exchange' (AIM is not recognised). Do a Google search for "avoid IHT with AIM shares".

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Feb 15, 2013 at 16:34

I was about to comment that the feature on reducing IHT is lacking in any worthwhile guidance, but Maxwell Gower says it all succinctly

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Rob Walker

Feb 15, 2013 at 16:37

Keep spending and delay your death until it's all gone - simple!

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Feb 15, 2013 at 16:59

If you have capital, spend it, buy the car, holidays, treat friends.

If you have property free of encumberances, raise an equity release and spend the cash raised.

Enjoy the pleasures and luxuries, why deny yourself and worry yourself into an early grave.

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Feb 15, 2013 at 17:11

If you're going to live for 7 years you can start a trust fund.

You can buy a farm and leave it IHT free

You can buy a forest or wood and leave it IHT free.

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peter montgomery

Feb 15, 2013 at 17:41

Buy a portfolio of good quality AIM stocks which pay dividends out of recurring profits and are in 'basic' operations,such as consumer staples.AIM by its nature tends to have a large number of family controlled companies so their influences ,and past stewardship,are crucial. Youngs Breweries and Nichols are 2 AIM favourites which have rewarded long term investors.The one major danger is that a meddling Chancellor will change the post 2 year exemption-as occurred a few years ago when due to public anger over the low effective CGT rate on venture capital realisations,the concessionary tax rate went from a 10% one to normal rate.Thus,one of the reasons for holding such assets ,was removed due to the rampant greed of the venture capitalists-a probably unintended consequence but nevertheless a warning that politicians have a habit of meddling with the best thought out plans!

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Feb 15, 2013 at 17:48

If you are young enough , have a brain ,and are likely to build a successful business emigrate to a country without Inheritance tax - Australia for example . You still have a domicile problem if you were born in the UK but this can be overcome if you have no assets remaining in this country and take advice and plan never to return ( other than occasional holidays or business trips )

Don't forget you are not wanted here . Entrepreneurs are viewed as a cash cow to be taxed to the hilt in life and death- to create a fair society - to donate to idle and feckless .

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Feb 15, 2013 at 17:50

I think the politicians are missing a trick here. Although IHT affects relatively few people, as the comments above show it is one tax that is universally loathed and invariably excites comment. Obviously Labour will always be 'for' it for ideological reasons and yet George Osborne's 'promise' to raise the threshold to £1m was so popular it rattled Gordon Brown into deferring an election he would probably have won. And yet Osborne is now backtracking. The politician who is brave enough to draw the teeth of IHT is onto a vote winner, I reckon, and although it wouldn't appeal to Labour's 'core' supporters, it might just win over the Middle Classes who they need to attract if they are ever to win another election outright.

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Anonymous 3 needed this 'off the record'

Feb 15, 2013 at 17:52

For most ordinary people with modest investments and one family home Long term care is a bigger destroyer of estates than IHT

IHT = 40% tax on balance over very generous IHT free limit of £650,000

LTC = 100% tax on excess over I believe £23,000. Yes soon to rise but LTC costs will still continue to decimate very modest estates.

Its funny most people plan/insure to save 40% IHT but never insure against the 100% LTC tax

If you want to preserve your estate then better for most people to plan against LTC tax than worry about IHT.

Agree best advice if your health is good spend spend spend and enjoy life most kids will understand and be grateful for whats left.

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Feb 15, 2013 at 18:13

I read somewhere that gold is free of inheritance I suppose if you learn you are on the way out the answer is to buy a load of gold and give it to your family. The loss on buying and selling is apparently about 10% - and then you have the vagaries of the gold market. I can't say that I have done anything about it but it might be an idea to tuck away.

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Hilary hames

Feb 15, 2013 at 20:36

@peter Montgomery

your post is interesting, are there any more companies that spring to mind other than Youngs Breweries and Nichols?

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landlord 88

Feb 15, 2013 at 22:13

Dislexic Landlord - most get-rid-of-IHT ideas are quite restrictive. Try this : sell your properties to a 'company' in return for an annual income for life ie buy an annuity. As far as I know, there is nothing to say who can or cannot own or control the company as long as the transaction is done at 'arms length'. Best take professional valuation and advice which will probably cost more than IHT. Probably too easy.

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Feb 15, 2013 at 22:34

That annual exemption of £3k was about the same in the 70s and the thieving govts haven't increased it. Well I suggest we do the same for their pay, keep it at the same level for the next 40 years, as well as their pensions.

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Feb 15, 2013 at 23:28

Completely daft, and who is going to keep track of it? How is it a taxable event to give money to your children, but totally OK to spend it on holidays, jewellery, bathrooms, kitchens....what business is it of governments how you spend your money? And how many MPs take any notice of these sort of rules that they are so keen to impose on other people? They probably spend that amount on lunch.

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White Stick follower

Feb 16, 2013 at 12:27

Gold is not free of IHT. The possible confusion arises here because at one time investments in gold which was not physically ever possessed was free of VAT. Gold coins, e.g. sovereigns or krugerrands, not commemoratives or medallions, are considered to be money & as such are free of VAT.

One exemption from IHT is gifts to political parties, which all goes to show how little morality politicians have- "you can't give unlimited chunks of cash to your family & friends, but you can give to us politicians."

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Anonymous 4 needed this 'off the record'

Feb 16, 2013 at 14:37

Apart from mortgaging create another debt, ( believe effective also for CGT and LTC), to creditors like you children who helped you with private hospital stays, nursing, supplementing pension etc

Include these debts in your will, have paper trail or even register as a debt on your home.

Debts is not always bad for you. Especially loans without interest.

Remember it is your money, spend to pamper yourself at the times of need especially.

Also remember your children's children will be much poorer (education fees, ability to have a deposit) cascade your wealth, they will remember you for it. That matters more that bench in the park.

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Feb 16, 2013 at 15:44

James Halstaed (JHD) are an excellent family company whose shares have performed extraordinarily well over the years. They tend to be ignored by the whiz-kids in the City - which of them would have an interest in a flooring manufacturer located in the backwoods of Greater manchester?!!!

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Feb 16, 2013 at 15:52

By the way, I am a Nichols shareholder as well. Another family company - their best-known product is Vimto but they also produce the Levi Roots drinks. Like Halsteads they have more than earned their keep over the years.

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peter montgomery

Feb 16, 2013 at 16:34

I did not mention James Halstead -which I personally own-as its very unmarketable unlike Nichols which can turn over 25000 shares daily.(that said I see 65000 moved yesterday!)Youngs marketability has also increased since Guinness Peat got off their backs and sold out around 6 months ago.Wynnstay,MP Evans and NWF are also decently managed businesses although with some cyclicality and purchasers should be aware of that before rushing in for the IHT benefits.

Shares on 'PLUS' or whatever it calls itself now ,also qualify ;there used to be some great family breweries listed there but Jennings and Brakespear sold out,Adnams and Thwaites seem unable to bow to the unthinkable and let outside management run the business strategically-unlike Youngs/Fullers-and Shepherd Neame has real issues with booze smuggling in the South East./Kent area.

Hilary asked about others;Smith and Williamson,I think,have an AIM fund which would be worth looking at in terms of names in the portfolio although,perversely,I believe the fund is not IHT exempt. Another stupid quirk which discourages risk spreading.!!

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an elder one

Feb 16, 2013 at 18:39


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Feb 17, 2013 at 00:19

Sold my Shares listed on "PLUS" in May last year as I had become nervous about their marketability.

Held 1200 Thwaites Shares for over 20 years and made less than 20%! Started going to the AGM after I retired a few years ago - at the last one I attended I complained to the Chairwoman about the poor performance of the Company and was told that I could always sell my Shares if I was unhappy! Another Shareholder stood up and asked her to apologise to me for that remark as he was not impressed either. They have recently made an attempt to re-brand themselves with new signage and very smart drays but are not really going anywhere. Some pubs have closed locally to me.

Sold my (larger) holding in Shepherd-Neame at the same time. They made a decent return but, as you say, given their location in Kent, there are issues with booze smuggling.

Have been a holder of Fullers for over 20 years and they have performed very well.

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an elder one

Feb 17, 2013 at 10:17

An iniquitous tax; the death of endeavour. If government want it, they'll get it by foul means or foul, whatever you try; spend it now, and they'll take only 20% by VAT, after income tax; a joke!

One can wonder why there should be any way to avoid it at all, it smacks of corruption in places.

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an elder one

Feb 17, 2013 at 10:31

If the Tories want to win in 2015, they should kill IHT; amongst other things!

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peter montgomery

Feb 17, 2013 at 10:48

Daniel Thwaites has only itself to blame for the unfortunate debt riddled position it finds itself in. The current chair,Mrs Yerburgh continues the dominance of the Family and resistance to inevitable change.The firesale of the London hotel to repay bank debt and unbelievable losses on financial instruments are in marked contrast to its rivals who bought in new(non-family) management and were prepared to think the unthinkable(Youngs sale of brewing to Wells).Thwaites thinks its salvation lies in selling the Blackburn site to a supermarket;meanwhile debt rises and the 'wet-led' trade is in both cyclical and secular decline.Thwaites underlines the perils of investing in AIM-namely that the dominant shareholders will fail to adapt or change and the more pressure is applied the more stubborn they become.

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Paul Annys via mobile

May 09, 2013 at 23:58

Like most things in life, finding the right balance is likely to be the best approach. Gifting all your money away is unlikely to suit most people, likewise investing in to smaller companies won't feel right for many either- but using a range of exemptions coupled with careful planning over time, would solve many issues and help reduce the potential burden of inheritance tax.

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J Rue

May 17, 2013 at 23:35

How about working out how much IHT will need to be paid, then take out a life insurance policy to cover that amount. The insurance company can put it into a trust so it will not be part of your estate therefor not touched by HMRC and it will leave your estate for your heirs.

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Mike bassford via mobile

Aug 09, 2013 at 22:53

Such a spiteful ignorant tax. Labour obsessed with making the rich poorer I stead if the poor richer.

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William George Dunbar

Sep 01, 2013 at 21:18

Do you have cash savings greater than the value of your home? Here is a one suggestion to reducing the value of your estate and escape Inheritance Tax if the value is already too high.

If you intend to remain in your home for the rest of your days, sell your house to your children! Do not gift it to them, for there is a seven year rule about giving gifts!

Go to an estate agent and tell them that you have a group of people interested in buying your house without a mortgage. Because the house has not been advertised, you will not have to pay the estate fees for that service. YOU issue a cheque for the value of the house and the cost of the deeds being transferred to the new owners. Of course the money goes back into your own bank account.

So your children ‘buy’ the house legally (using YOUR money) and the deeds are transferred so they become the owners. They would have inherited it when you died - so they have got it early and allow you stay there rent free. You will continue to pay the usual bills and maintenance and the house will increase in value and they will get a greater ‘inheritance’ when it is sold after you die.

Before taking this course, you must have trust in your children.

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sam dalton

Jan 24, 2015 at 17:48

If you buy sovereigns which is technically £1 face value you can technically gift £250 to a person which equals 250 sovereigns but with an actual value of £ 50k or around that. Would that be liable for CGT? it is still legal tender.

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