How to cut your inheritance tax bill

Reducing inheritance tax liability is becoming increasingly important, a financial advisory company has warned, as more households are pulled into the IHT net.

Earlier this year, chancellor George Osborne froze the level at which inheritance tax becomes payable at £325,000 for individuals and £650,000 for couples until 2019. And with property prices once again increasing and household savings improving, more people than ever before are affected.

"Leaving a legacy to loved ones is a very human instinct and people feel especially aggrieved by this form of tax, because it is, in effect, a form of double taxation as tax is being paid on assets which have already been paid for and previously taxed," says Nigel Green, the deVere Group's founder and chief executive.

"As such - and because more people are now being affected by it, and no doubt because there is an ageing population - an increasing number of families are keen to prioritise estate planning ahead of other factors in their long-term financial strategies in order to mitigate the potential IHT liabilities."

According to a report last week from the Office of National Statistics, the government's IHT take rose by 8% last year to top £3.1 billion. It's the third annual rise in a row, after falls between 2007 and 2009 caused in part by the economic downturn.

But the good news is that there are a number of tried and tested ways to minimise IHT liability.

1. Give it away in advance

Unfortunately, it's not possible to avoid IHT by giving away all your assets on your deathbed. However, if the donor survives for seven years after making a gift, IHT doesn't apply. Smaller gifts, too, can be made within seven years of death without incurring a liability: in any given year, it's possible to give away £3,000 tax free, and this allowance can be carried over for one year. Gifts to charities and political parties are inheritance tax-free, as are regular gifts from income rather than assets.

2. Make use of the nil-rate band

While the IHT threshold may have been frozen at £325,000, it applies to both halves of a couple. It's worth making sure, therefore, that both partners are able to benefit by splitting assets between the two. Similarly, owning a property as tenant in common - with a spouse, grown-up child or other person - reduces the size of the taxable estate when the surviving tenants in common die.

3. Make investments that qualify for relief

Investments in Enterprise Investment Schemes and AIM shares are exempt from IHT - although here it's important to weigh up the balance between the tax saving and the potential investment risk. Agricultural property and woodland can also be exempt - one reason, perhaps, why so many wealthy individuals seem to take an interest in farming in later life.

4. Establish a trust

Assets held in trust can fall outside the IHT rules, so that only assets transferred out of the trust and into individual ownership are liable. But it's vital to make sure that you pick your trustees carefully, to make sure that they follow your wishes; there's no legal obligation on them to do so. And HMRC has been tightening up the rules on trusts, meaning they need to be set up very carefully

5. Talk to the experts

IHT planning is a complex area, and it's worth spending a few hundred pounds to make sure of getting it right. In addition, HMRC has an eagle eye for anything that looks like shady business, and there's sometimes a fine line between tax-efficiency and tax avoidance. The most important tip of all, therefore, is to get professional advice.