How to Avoid Inheritance Tax in the UK – 7 Legal Loopholes to Cut Costs in 2022
2. Downsize and give money to your kids
After Ronnie Corbett died in late March 2016, it emerged he sold his family home in 2003 for £1.27million, apparently to raise money which could be given to his children without paying inheritance tax .
He and his wife have downsized to local property worth about a fifth of their former home.
The buyer of the previous property, which they had lived in for more than 30 years, reportedly said the couple moved in order to provide money for their two adult children.
How it works
One of the main things about inheritance tax is that it applies to assets you own at the time of your death, but it also applies to assets you disposed of within the seven years before your death. death. This is to prevent “deathbed” donations as a means of avoiding tax.
Tax on assets above the tax-free threshold, which is £325,000 per person or double that for married couples, £650,000, is applied at 40pc. In April 2017, individuals were able to claim for the first time an additional allowance of £100,000 to compensate for the sale of a family home on death, on top of their existing inheritance tax exemption of £325,000. That allowance now stands at £175,000, allowing a couple to pass on estates of £1million tax-free.
Therefore, if you plan to donate substantial assets such as real estate or very large sums of money from the sale of real estate, you must live after the donation for seven years for it to be exempt. of tax. . During this seven-year period, the tax is applied at a variable rate.
where it might not work
You can’t give away something like a property and continue to live there without running into the “gift with reservation” rules.
You would either need to pay market rent to the new landlords (probably your children) or find alternative accommodation.
Selling real estate and downsizing is, in addition to a tax decision, also an investment decision: the property could continue to grow in value more than the money.
In Ronnie Corbett’s case, it might have been better to continue owning the larger property and paying inheritance tax than to cash out and move to a smaller property.
3. Use a Deed of Alteration to Pass Inheritances to Your Children
This is a useful trick that is little understood and relatively little used. It involves the recipient of money or other assets in a will passing those assets directly to another beneficiary.
This usually works where the primary beneficiary already has assets worth more than the tax-free threshold of £325,000 (£650,000 for a married couple).
When former MP Tony Benn died in 2014, it emerged that ownership of his prized west London home had been split upon the death of his wife in 2000, with the couple’s children becoming co-owners.
Why? A possible answer is that the objective was to reduce inheritance tax.
How it would have worked
In 2000 the non-taxable allowance was £234,000 per person (instead of £325,000 like today), but especially in 2000 you couldn’t add up the individual allowances of a married couple, the two s applying on the death of the second spouse.
This generous extension was only introduced in 2007.
If Mrs. Benn had simply bequeathed her share to her husband, no tax would have been owed by him, since property passed between married couples is exempt. But, crucially, he would have had more assets to bequeath to his children upon his own future death – and the benefit of his wife’s personal IHT allowance would have been wasted.
The Benns may have carefully planned ahead and drafted a will in which his share went to the heirs upon his death.