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What clients might do without an adviser’s help

This article is part of
Guide to Inheritance Tax Planning

There are a number of simple actions a client can take to mitigate a potential inheritance tax liability without an adviser.

Jeremy Pearson, technical support manager at Canada Life, suggests: “They might make use of the available exemptions and the nil rate band, by making gifts to their children and grandchildren, for example.

“Anything else involves trusts, insurance policies or specialist IHT products which can be a minefield without professional advice,” he stresses.

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Clients should first of all identify the value of their total estate in order to calculate what the inheritance tax liability would be if they took no action, suggests Keith Thomson, director of investment services at Blackadders.

Then there are a number of ways clients can mitigate the impact of IHT:

• Spending the capital due in the course of their lifetime so that the estate is not in excess of the IHT allowance at death.

• Monetary gifts to individuals, whether these be family such as children and grandchildren, are subject to an annual allowance of up to £3,000 per tax year per donor, with this amount being removed from a client’s estate immediately. If a client hasn’t used his or her exemption in one tax year it can be carried forward for one year only to give a maximum gift of £6,000.

• Cash gifts to charities, community amateur sports clubs, and political parties are also removed from a client’s estate immediately and are not included under the seven-year gifting rule for IHT calculation purposes.

• Wedding gifts in consideration of marriage are exempt where given by a parent of the bride or groom up to £5,000, whilst gifts between the bride and groom or by their grandparents or remoter ancestors of up to £2,500 are also exempt, and gifts of £1,000 by anyone else also fall under this exemption allowance.

• Lifetime gifts for the maintenance of a spouse, child or dependent relative are exempt from tax. For a child, the gift must be for their maintenance, education or training up to the age of 18, or until full time education ends if that is later.

Jason Ashman, financial planning manager at Henwood Court Financial Planning, adds two more suggestions:

• Make gifts from surplus income. A little-used exemption allows individuals to make gifts from surplus income without limit so long as the gift is made out of income and not capital, forms part of a regular pattern and in making the gift it does not materially undermine the donor’s standard of living.

• Use small gifts exemption: An individual can make small gifts up to the value of £250 to as many individuals as you like in any one tax year.