Being wealthy in retirement - Minimizing Inheritance Tax

Although inheritance tax is aimed at very large estates, many people, particularly in the southeast of England, now own a house which alone would be liable to the tax when they die.

If you think you may have more than £110,000 to leave when you die, especially if you have given away large amounts of money or valuables in the last few years, you should seek advice. There are schemes around which offer ways to reduce the impact of inheritance tax.

But do take care before embarking on any plan which creates artificial arrangements to avoid inheritance tax. If you adopt a scheme which later is ruled to be invalid, it will be your heirs, not the person who sold it to you, who are liable for the tax.

If you are concerned, the simplest and safest thing you can do is to give away money or valuables to your heirs up to the value of the exemptions each year. If you want to make a larger gift, you should consider taking out a life insurance policy which would pay sufficient to cover the tax should you die within seven years. If you survive beyond seven years, the policy lapses.

However, there is not much you can do about the value of your house. There are special restrictions to stop you giving away a house and continuing to live in it. It is counted as yours until you stop having any benefit from it at all.

So unless you give your home away outright and stop living in it at least seven years before you die, it will count as part of your estate. There is some softening of the rules in cases of medical or personal necessity. But normally the house you live in will have to pass intact, and if it is worth more than £110,000, then tax will be due.

A couple with a large estate which they own jointly should consider separating it so that they each own a part of it. They should then draw up new wills each leaving their part to their children or grandchildren. If they do not do that, the children will end up paying more tax when the second parent dies.

For example, an estate worth £200,000 will attract no tax if the first of a couple to die leaves £100,000 to their children and the remainder to the survivor and no tax when the survivor dies and leaves the remaining £100,000 to the children. But if the first to die leaves the whole estate to the survivor who then dies and leaves the whole amount to the children, tax of £66,000 will be due on the total of £200,000.

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Being wealthy in retirement - Avoiding excessive Inheritance tax

Similarly, it is as well to skip a generation and pass on some property to grandchildren if leaving it to the children would then boost their own estate in later life.
However, these considerations are mainly for rich families. For most people the tax is due largely because their house is worth a lot of money and there is little that can be done to avoid paying that. And do remember in your keenness to avoid inheritance tax not to leave yourself without adequate resources in old age. Younger relatives may be very grateful for pre-death gifts, but they will not expect to use them to support you!
The inheritance tax rules are different in important respects from the capital transfer tax rules. If you have made a will . . . ... see: Being wealthy in retirement - Avoiding excessive Inheritance tax