Minimise UK inheritance tax

Consideration for inheritance tax

Inheritance tax is a real pain for many families. The maximum allowance that is inheritance tax free will rise to £1million. However, given the rapid rise in property prices it is possible that many will find themselves being caught out. The following article outlines some broad ideas to consider in order to minimise the exposure to inheritance tax liabilities:

Tax evasion is illegal. Tax avoidance is good planning.

The following article is exclusive to the UK tax regime as of 2016.

There are multiple methods to reduce the inheritance tax burden on the next generation. 

The seven year inheritance tax rule

Any amount of money/ wealth that you have transferred to the next generation will be free from inheritance tax if you transfer your property at least seven years before your passing. Should you pass away prior to the seven year time limit then depending on how near to the seven years will result in a portion of the property being subject to inheritance tax. The proportion is in line with how near to the seven years you passed. For example, six years will result in less of your property being subject to inheritance tax than two years.

Families looking to minimise their inheritance tax liability should look to encourage the passing on of assets that are no longer required to loved ones at the earliest possible opportunity.

Passing on a business to avoid inheritance tax

There are certain rules surrounding passing on a family business into your loved ones. Depending on the type of business and the length of time that your loved ones are willing to hold onto the business, 50% or even 100% of the business could be free from inheritance tax.

An odd quirk of UK tax law means that a farm is 100% free from inheritance tax so long as the farm continued to be 'farmed' and it's use is not converted away from agriculture.

Passing on pensions

Private pensions that still have a balance are inheritance tax free when passed on to those in your will. This helps to support a strong case for putting money into a pension. Not only are you avoiding income tax today, you are also likely getting a top up from your company match scheme (hopefully!) and the cherry on the cake is that if you die the pot will not be subject to inheritance tax!

AIM to invest

Shares in the AIM market (one of the junior UK stock markets) can be free from inheritance tax when passed onto your children. 

There are various criteria with which to comply in order to qualify. For example the AIM shares should be owned for at least two years. In addition the people who inherit your shares are required to hold the shares for a certain period of time.

Be careful though. AIM shares tend to be growth companies and hence are normally associated with higher risk. Make sure you know what you're doing before you invest in AIM shares to ensure that you don't end up passing onto your children less than you started with!

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