Magus Private Wealth
0203 176 5888
July
10
Don’t pass
your wealth
on to the taxman

By Dante Peters

Whilst I really don’t want to be a fun sponge, it’s often said that death and taxes are the only certainties in life and when it comes to inheritance tax (IHT) they tend to go hand in hand.

Making sure you are clear on what you want to do on your death could mean that you don’t end up paying a disproportionate amount to the tax man – I’m sure given the choice between giving money to your favourite relatives, your best friend, a worthy charity or the taxman, I’m guessing you wouldn’t choose the taxman.

Inheritance tax cost the UK £5.4 billion last year, nearly double since 2011 – and it's set to rise again this year, with some research suggesting it could rise to almost £10 billion by 2030.

House prices could provide some of the reasons behind this massive number, with more families inheriting properties worth more than £325,000 (the threshold at which inheritance tax kicks in).

Currently they must pay tax at 40% on the value of any assets (including property, possessions and savings) over this limit when someone dies. If you leave your home to your spouse or civil partner, you can pass it on tax-free, and the threshold is raised to £475,000* if you leave it to your children or grandchildren.

It’s important to note your pension or drawdown plan are not included. They normally sit outside your estate at death for IHT purposes.

*The residence Nil rate band of £150,000 for 2019/20 increasing to £175,000 in 2020/21 – This makes the total figure £475,000 increasing to £500,000 in 2020/21. This figure is also subject to certain qualifying criteria.

Some good news

Let’s lighten the mood and talk about how you could potentially reduce your IHT liability now – before we start I am obliged to remind you that this can be a complex subject and is of course dependent on your individual circumstances.

Your gift allowances

Each tax year you can give away up to £3,000 IHT free – this can be cash or assets and there are no restrictions on who you make the gift to, so it could be a friend or relative. This exemption means that even if you were to pass away straight after giving the money, it would not be included when calculating the value of your estate and would be inheritance tax-free.

And if you don't use the full £3,000 allowance in one year, you can roll it over to the next (so, if you gifted £2,500 one year, you could carry forward £500 worth of allowance and gift £3,500 in the next – but you can’t do this over multiple years).

There are also lesser-known gift allowances that you can use too, for example the ‘marriage exemption’ which allows anyone to gift money to their children, grandchildren or great-grandchildren when they decide to marry.

Gifts out of regular income

You may be lucky enough to have income that is in excess of your needs – a typical example of this could be when grandparents have finished paying off their mortgage. They could pass on to children or grandchildren regular monthly amounts up to the level of the former mortgage repayments.

For the gifts to qualify, you must be able to show that the payments are made out of surplus income (either earned income or investment income) and that they do not reduce your standard of living. You can’t pass on income and then use your capital to supplement living costs.

It would be easy for the grandparents in our example to show that this did not reduce their standard of living, because their disposable income remains the same.

Many people choose to pass on the cash in the form of a regular standing order into a nominated bank account. Alternatively, they use "surplus income" to fund payments into regular savings schemes such as unit trust plans or life policies, written in trust for the benefit of the children or grandchildren.

HMRC tends to see "surplus" income as net income after tax, minus ordinary living expenses, including utility bills, mortgage repayments (if relevant), food, travel and normal expenditure on leisure and holidays.

This is an often underused IHT allowance, claiming the relief is quite straightforward and you can begin gifting immediately. It is also very flexible, because you don't have to gift the same amount every year or make the gifts to the same person. Many people use the exemption to pass on money on a regular basis to children or grandchildren. One off gifts are not permitted, but you don’t have to make gifts to the same person every year. You can make them to whoever you like – an individual, a group of people or to a family trust fund, for example.

In order to keep the taxman happy there will need to be an element of bookkeeping carried out and a record of the gifts made retained, along with a copy of your tax return for the year concerned.

Make the most of ISAs

The tax benefits of ISAs were overhauled to make them even more appealing – if you’re married or in a civil partnership, you can effectively pass on your ISA to your surviving spouse on death, keeping all the ISA benefits.

This means the surviving spouse has a one-off additional ISA allowance that's equivalent to the value of the deceased partner's ISA when they died.

For example, if someone's spouse passes away, leaving an ISA worth £40,000, the surviving partner will not only have the £20,000 ISA 2019-20 tax year allowance, they'll also have an additional allowance (or additional permitted subscription) of £40,000 for inheriting their spouse's ISA.

Pass on you pension

The way that you decide to take your pension will affect what you can do with it when you pass away.

Pensions are normally tax free on death before 75. After 75, beneficiaries are charged their marginal rate of income tax when taking money. So, 20% for withdrawals that stay within a basic rate tax band. That’s half the standard rate of IHT and, in some cases, they could pay no tax at all.

Place assets into a trust

Assets placed within a trust are not considered part of your estate after 7 years (or immediately if covered by some exemptions), and, therefore, aren’t liable for IHT. There are several different types of trusts and they can be useful in some cases, for instance, if you want to create an inheritance for children.

Charitable donations

Leaving a part or your entire estate to charity can reduce, and in some situations, eliminate inheritance tax liability and if you leave something to charity in your will, then it won’t count towards the total taxable value of your estate.

The rules on how to work out what you can give away to charity to secure the lower tax rate aren’t always straightforward and this would need to form part of your estate planning.

Estate planning

Estate planning is all about ensuring that family wealth passes into the right hands at the right time, with minimum liability to inheritance tax. But it’s not just effective estate planning solutions, it’s about expert guidance and support that helps you make the right decisions.

The simple things

It’s also about ensuring you have some of the basics in place – that could make things a little easier on your family when you’re not around, from making sure you have a will in place, to taking out life insurance to help with costs when you’re gone.

If you haven’t already, you may want to appoint a ‘lasting power of attorney’ to help you make decisions or to make decisions on your behalf, giving you more control over what happens to you if you have an accident or an illness and cannot make your own decisions.

Spend it

There are numerous ways to mitigate IHT, some of which we have covered – usually it’s a combination of different things. However, another, more radical option you could explore is spending some of your money on the things you really love in life. You must of course be careful and make sure your loved ones have financial security, but it’s also easy to lose sight of the point of money.

Money is an enabler, to give you freedom to achieve the things that are truly important – Our brand promise at Magus is simple

‘Live a life you love. Let us simplify and organise your financial world’

– so whilst our job is to ensure you achieve your financial goals and to give you peace of mind so you know your family are taken care of, even when you’re not here – maybe it’s also our job to remind you that whilst you are here and it’s possible to do so, that sometimes you should live in the moment, enjoy your money and create life-long memories along the way.

Finally, we hope none of this is news to you – it is important to think about these things and be aware of all your options, which we will have discussed with you, but as ever, if there is anything you would like to explore further or if you just have a question, please do get in touch with your usual Magus Financial Planner.



Tax rules and benefits are constantly changing and IHT planning is a complex subject – the ideal inheritance tax plan for you will vary depending on your individual circumstances.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.

The value of an investment may fall as well as rise. You may get back less than the original amount invested. It is therefore important that you understand the risks and commitments.

Past performance is not indicative of future performance.

This article should be used for information purposes only and is subject to change without notice. None of the information contained in this article constitutes financial or other professional advice in any way. If you require additional information, you should contact Magus directly.

While Magus uses reasonable efforts to ensure that the information contained within articles is current and accurate at the date of publication, no warranties are made, either expressed or implied, as to reliability, accuracy or completeness of the information. Magus accepts no liability for any loss arising directly or indirectly from the use of or action taken in reliance on such information.

No warranty is given as to the freedom of this article from errors, defects, viruses, malicious programs or macros. Links from this article exist for information only and Magus accepts no responsibility or liability for the information contained on any such site. The existence of a link to another website does not imply or express endorsement of its provider, product or services by Magus. Please note that clicking on links to external websites will cause you to leave the Magus website.

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Don’t pass your wealth on to the taxman

Whilst I really don’t want to be a fun sponge, it’s often said that death and taxes are the only certainties in life and when it comes to inheritance tax (IHT) they tend to go hand in hand.

Making sure you are clear on what you want to do on your death could mean that you don’t end up paying a disproportionate amount to the tax man – I’m sure given the choice between giving money to your favourite relatives, your best friend, a worthy charity or the taxman, I’m guessing you wouldn’t choose the taxman.

Inheritance tax cost the UK £5.4 billion last year, nearly double since 2011 – and it's set to rise again this year, with some research suggesting it could rise to almost £10 billion by 2030.

House prices could provide some of the reasons behind this massive number, with more families inheriting properties worth more than £325,000 (the threshold at which inheritance tax kicks in).

Currently they must pay tax at 40% on the value of any assets (including property, possessions and savings) over this limit when someone dies. If you leave your home to your spouse or civil partner, you can pass it on tax-free, and the threshold is raised to £475,000* if you leave it to your children or grandchildren.

It’s important to note your pension or drawdown plan are not included. They normally sit outside your estate at death for IHT purposes.

*The residence Nil rate band of £150,000 for 2019/20 increasing to £175,000 in 2020/21 – This makes the total figure £475,000 increasing to £500,000 in 2020/21. This figure is also subject to certain qualifying criteria.

Some good news

Let’s lighten the mood and talk about how you could potentially reduce your IHT liability now – before we start I am obliged to remind you that this can be a complex subject and is of course dependent on your individual circumstances.

Your gift allowances

Each tax year you can give away up to £3,000 IHT free – this can be cash or assets and there are no restrictions on who you make the gift to, so it could be a friend or relative. This exemption means that even if you were to pass away straight after giving the money, it would not be included when calculating the value of your estate and would be inheritance tax-free.

And if you don't use the full £3,000 allowance in one year, you can roll it over to the next (so, if you gifted £2,500 one year, you could carry forward £500 worth of allowance and gift £3,500 in the next – but you can’t do this over multiple years).

There are also lesser-known gift allowances that you can use too, for example the ‘marriage exemption’ which allows anyone to gift money to their children, grandchildren or great-grandchildren when they decide to marry.

Gifts out of regular income

You may be lucky enough to have income that is in excess of your needs – a typical example of this could be when grandparents have finished paying off their mortgage. They could pass on to children or grandchildren regular monthly amounts up to the level of the former mortgage repayments.

For the gifts to qualify, you must be able to show that the payments are made out of surplus income (either earned income or investment income) and that they do not reduce your standard of living. You can’t pass on income and then use your capital to supplement living costs.

It would be easy for the grandparents in our example to show that this did not reduce their standard of living, because their disposable income remains the same.

Many people choose to pass on the cash in the form of a regular standing order into a nominated bank account. Alternatively, they use "surplus income" to fund payments into regular savings schemes such as unit trust plans or life policies, written in trust for the benefit of the children or grandchildren.

HMRC tends to see "surplus" income as net income after tax, minus ordinary living expenses, including utility bills, mortgage repayments (if relevant), food, travel and normal expenditure on leisure and holidays.

This is an often underused IHT allowance, claiming the relief is quite straightforward and you can begin gifting immediately. It is also very flexible, because you don't have to gift the same amount every year or make the gifts to the same person. Many people use the exemption to pass on money on a regular basis to children or grandchildren. One off gifts are not permitted, but you don’t have to make gifts to the same person every year. You can make them to whoever you like – an individual, a group of people or to a family trust fund, for example.

In order to keep the taxman happy there will need to be an element of bookkeeping carried out and a record of the gifts made retained, along with a copy of your tax return for the year concerned.

Make the most of ISAs

The tax benefits of ISAs were overhauled to make them even more appealing – if you’re married or in a civil partnership, you can effectively pass on your ISA to your surviving spouse on death, keeping all the ISA benefits.

This means the surviving spouse has a one-off additional ISA allowance that's equivalent to the value of the deceased partner's ISA when they died.

For example, if someone's spouse passes away, leaving an ISA worth £40,000, the surviving partner will not only have the £20,000 ISA 2019-20 tax year allowance, they'll also have an additional allowance (or additional permitted subscription) of £40,000 for inheriting their spouse's ISA.

Pass on you pension

The way that you decide to take your pension will affect what you can do with it when you pass away.

Pensions are normally tax free on death before 75. After 75, beneficiaries are charged their marginal rate of income tax when taking money. So, 20% for withdrawals that stay within a basic rate tax band. That’s half the standard rate of IHT and, in some cases, they could pay no tax at all.

Place assets into a trust

Assets placed within a trust are not considered part of your estate after 7 years (or immediately if covered by some exemptions), and, therefore, aren’t liable for IHT. There are several different types of trusts and they can be useful in some cases, for instance, if you want to create an inheritance for children.

Charitable donations

Leaving a part or your entire estate to charity can reduce, and in some situations, eliminate inheritance tax liability and if you leave something to charity in your will, then it won’t count towards the total taxable value of your estate.

The rules on how to work out what you can give away to charity to secure the lower tax rate aren’t always straightforward and this would need to form part of your estate planning.

Estate planning

Estate planning is all about ensuring that family wealth passes into the right hands at the right time, with minimum liability to inheritance tax. But it’s not just effective estate planning solutions, it’s about expert guidance and support that helps you make the right decisions.

The simple things

It’s also about ensuring you have some of the basics in place – that could make things a little easier on your family when you’re not around, from making sure you have a will in place, to taking out life insurance to help with costs when you’re gone.

If you haven’t already, you may want to appoint a ‘lasting power of attorney’ to help you make decisions or to make decisions on your behalf, giving you more control over what happens to you if you have an accident or an illness and cannot make your own decisions.

Spend it

There are numerous ways to mitigate IHT, some of which we have covered – usually it’s a combination of different things. However, another, more radical option you could explore is spending some of your money on the things you really love in life. You must of course be careful and make sure your loved ones have financial security, but it’s also easy to lose sight of the point of money.

Money is an enabler, to give you freedom to achieve the things that are truly important – Our brand promise at Magus is simple

‘Live a life you love. Let us simplify and organise your financial world’

– so whilst our job is to ensure you achieve your financial goals and to give you peace of mind so you know your family are taken care of, even when you’re not here – maybe it’s also our job to remind you that whilst you are here and it’s possible to do so, that sometimes you should live in the moment, enjoy your money and create life-long memories along the way.

Finally, we hope none of this is news to you – it is important to think about these things and be aware of all your options, which we will have discussed with you, but as ever, if there is anything you would like to explore further or if you just have a question, please do get in touch with your usual Magus Financial Planner.



Tax rules and benefits are constantly changing and IHT planning is a complex subject – the ideal inheritance tax plan for you will vary depending on your individual circumstances.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.

The value of an investment may fall as well as rise. You may get back less than the original amount invested. It is therefore important that you understand the risks and commitments.

Past performance is not indicative of future performance.

This article should be used for information purposes only and is subject to change without notice. None of the information contained in this article constitutes financial or other professional advice in any way. If you require additional information, you should contact Magus directly.

While Magus uses reasonable efforts to ensure that the information contained within articles is current and accurate at the date of publication, no warranties are made, either expressed or implied, as to reliability, accuracy or completeness of the information. Magus accepts no liability for any loss arising directly or indirectly from the use of or action taken in reliance on such information.

No warranty is given as to the freedom of this article from errors, defects, viruses, malicious programs or macros. Links from this article exist for information only and Magus accepts no responsibility or liability for the information contained on any such site. The existence of a link to another website does not imply or express endorsement of its provider, product or services by Magus. Please note that clicking on links to external websites will cause you to leave the Magus website.

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