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With more families facing inheritance tax (IHT) bills, has given tips to help minimise your estate’s exposure to the tax.

House prices have been rocketing, particularly in property hot-spots like London and the Southeast. But while it’s nice to see the value of your home rising, yet the property boom also means that thousands of people might be sleepwalking into leaving their beneficiaries with a hefty inheritance tax bill when they pass on. The issue at stake is that the inheritance tax threshold has been frozen at £325,000 for some years now and is set to remain so until at least 2016 – all while inflation and the value of property are ticking up. Even those who consider themselves only moderately affluent are likely to get caught by the IHT net once their house and even modest savings are taken into account.

After the £325,000 threshold, assets bequeathed are subject to a 40% tax. It’s not just the eye-watering level of tax or the fact that you’ve probably already paid several taxes on these funds in some shape or form that should give you pause. It is also often the case that rather than leaving a unencumbered property to loved ones, you leave them a problem to solve: selling a property in order to be able to pay the inheritance tax due upon it.

The good news is that there are lots of strategies wealth managers can advise you on to help reduce the IHT liability on your estate. Some are well known and quite simple, but others require more expertise to deploy. The key to most of them however is the same and that is to start thinking about things sooner rather than later.

Nobody likes contemplating their own demise yet not doing so can have a hugely negative impact on your ability to keep more of your hard-earned money in your family and out of the taxman’s clutches.

As with all the IHT planning, the earlier you take advice the more options will be open to you and your loved ones.

Savvy strategies

The first option which springs to mind is “gifting” while you are alive– simply giving the assets to loved ones ahead of time, you might say. You need to be really careful here though, as you must live on for seven years after the gift has been made or the tax can still apply (abeit not necessarily at the full rate if the period is longer than a few years). The rules also require that the assets are really given away, so you no longer benefit from them. As such, it’s not enough to nominally give away your house and keep on living in it; market rate rent would need to be paid to the recipient to keep within the rules. These hidden pitfalls are why proper financial advice is essential.

Married couples should remember that, as long as they are both UK-domiciled for tax purposes, married couples can pass assets to each other without incurring IHT (or using up their own nil rate band). This means that if everything is left to one surviving spouse they can eventually leave an estate of up to £650,000 without it incurring the 40% inheritance tax.

IHT efficient-investing

There are several types of investment which may qualify for IHT exemption when they are bequeathed because they come under the regime for business or agricultural property. Venture Capital Trusts and Enterprise Investment Schemes are popular ways to minimise IHT, since the exemption can kick in after just two years of holding shares. Investors can now also hold AIM-listed shares in an ISA wrapper and these can also be bequeathed free of IHT after being held for the same period. Investing in young or small companies can represent significantly higher investment risk, however, and shouldn’t be entered into without proper advice.

IHT and charitable giving

A further option you could discuss with your wealth manager making a significant gift to a charity – something which many people intend to do in any case. You could reduce the IHT liability on your estate from 40% to a lower rate of 36% if at least 10% of the total is left to charity. Complex calculations will apply when your estate is assessed, however, making it essential to consult an adviser with specialist tax expertise.

As the saying goes, there are two certainties in life – death and taxes – and IHT is where these two great inevitabilities intersect. Thankfully, however, the amount of IHT your loved ones will have to pay is not necessarily set in stone. As with all areas of your financial affairs, careful planning and a clever investment strategy can make all the difference.

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