The government claimed a whopping £3.14 billion in inheritance tax last year, 8% up on the previous year. So can you avoid paying inheritance tax without ending up behind bars or facing a hefty fine? Luckily there are a few common sense and perfectly legal ways to prevent the government taking a huge slice of the property you leave to your family, friends or local cat’s home. Here they are.
1. Don’t die intestate
As long as you have a Will, you’re unlikely to pay inheritance tax unnecessarily. Making a Will is the most sensible and simplest way to ensure you make proper plans to distribute your estate tax-efficiently.
2. Get gifting!
It’s entirely possible to gift items and remove them from your estate. You can ‘gift’ more or less any kind of asset, but you need to get a move on and make the gift 7 years or more before you die, otherwise your relatives might still end up liable for inheritance tax. One important thing to remember – if you gift your house to someone, you can’t keep living in it. As a general rule you can’t continue to benefit from something you’ve gifted.
3. Set up a trust
If you place an asset in trust, it’s usually safe from inheritance tax, and you can still keep a degree of control over the asset, for example controlling when the beneficiaries inherit it. This is useful if you don’t want to make a gift of a large sum of cash or a valuable asset when, for example, the beneficiaries are too young to appreciate it or handle it properly.
4. Invest your way out of a future tax burden
When you invest in an Enterprise investment scheme for at least two years, putting your cash to good use investing in the success of small and medium-sized SMEs, you can get as much as 30% income tax relief plus other tax benefits including exemption from inheritance tax. Another plus point – there’s no capital gains tax.
5. Dip into the Aim stock exchange
When you hold shares in companies listed on the Aim stock exchange for more than 2 years, your investment is inheritance tax free. You can even stash the cash in an ISA, with no capital gains tax or income tax to pay. And from April 2014 there’s no Stamp Duty on Aim transactions either. Just bear in mind that Aim shares are higher risk than the FTSE, with high growth potential but equally impressive potential for failure.