Save Your Children From Inheritance Tax

Posted: Tuesday February 16 2016

By: Abbie Coleman

By Tasoula Addison

The Legal Ways You Can Save Your Children From Inheritance Tax

Inheritance tax is a topic that has featured heavily in the news of late, with various revelations in particular to the Panama Papers and the way people plan financially, some legal some not so legal. The lump sum that David Cameron received from his Mother has been fervently discussed, as have the estates of Lynda Bellingham and Ronnie Corbett for other reasons. Ronnie Corbett’s news item was particularly interesting, as he was trying to save his children from the much-maligned Inheritance Tax (IHT) bill.

The question I want to discuss here is how can you as a mother plan effectively to save your children from a potentially hefty tax bill?

Why Inheritance Tax is becoming more relevant?

Many people assume that IHT is just a tax for the rich, but with the vast rises in house prices many more people who would consider themselves to be ‘ordinary’ are being dragged into the IHT net. This net is a 40% tax for everything that takes the value of your estate over the £325,000 boundary.

Many wealthy people are aware of these rules and regulations and have professional advisers telling them how to plan effectively. The differences comes as many ‘ordinary’ people aren’t especially aware of certain tax planning tools that can be used, perfectly legally, to reduce their potential IHT charge. As these exemptions and reliefs are set out in legislation, there is nothing unlawful about them at all.

Act On It Overarching pngWays to Reduce your Estate

There are a number of basic exemptions that mean you can make gifts each year, which could help to decrease the value of your estate, potentially bringing it under the IHT threshold whilst helping your children and close family members to benefit financially at the same time.

Everyone is entitled to make a yearly gift of up to £3,000, which falls out of your estate immediately. You can also give up to £250 to as many people as you like, as well as wedding gifts of £5,000 to a child, £2,500 to a grandchild and £1,000 to anyone else.

You may be aware of the story about David Cameron who received two separate payments of £100,000 as gifts from his mother in 2011. These gifts could potentially save the family £80,000 of inheritance tax. This is possible because it is classed as a “Potentially Exempt Transfer”. These larger gifts will not be subject to inheritance tax provided that the donor survives for a further seven years. If they die within seven years then the value of the gift is still taken into account for inheritance tax purposes. However, if the donor lives for seven years then the gift falls outside of their estate and they avoid IHT on the funds they have given away.

If you plan ahead and stick to the legislation then there are numerous ways to reduce your inheritance tax bill for your children. Simple actions can potentially save your family £10,000s and £100,000s, meaning they have this capital available when you pass away.