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I’m 77, nonetheless working and value £2.6m – how can I lower inheritance tax?

I’m 77 and have a £70,000 a year final salary pension from an employer that I worked for 30 years but after retiring I also set up my own business which makes about £50,000 a year.

At the end of every month, I still have money left over and save into a combination of cash and stocks and shares, usually using my whole Isa allowance each year.

My wife sadly died five years ago and I live alone in the family home we have owned since the mid-1980s and have two children in their mid-40s and five teenage grandchildren

My house is worth £1.8million and is mortgage-free and I have about £800,000 in savings and investments.

Think ahead: The earlier you start inheritance tax planning the better

Think ahead: The earlier you start inheritance tax planning the better

I would like to start giving some money away, as I realise a large chunk of my estate will end up facing inheritance tax and having paid plenty of tax over my working life – and still doing so now – I’d rather keep my children or grandchildren’s future bill to a minimum.

I realise that due to the seven-year rule, I should have done more of this earlier – as time may not be on my side here.

I have gifted my children money to help them buy their homes in the past but have been reluctant to just hand them large sums of cash beyond that without purpose.

My daughter has also told me that I should start spending more on myself, flying business class, taking holidays, going for dinner and getting taxis – even paying for a big family holiday – but I also don’t like wasting money.

I have been told that I could give money away out of excess income, but how do I do that and how do I prove it is income I don’t need?

How much inheritance tax is my estate likely to face, what can I do to reduce it, and how do I give away excess income? Anonymous, via email

Harvey Dorset, of This is Money, replies: While having enough to leave a sizeable inheritance to your loved ones is a good problem to have, you are right to flag that time might not be on your side to make use of options in the same way it is for those who are younger and start inheritance tax planning earlier.

However, there are certainly things that you can do to numb the sting of inheritance tax, and ensure that your family is left with as much of your estate as possible. 

There are limits on how much can be given away each year before an inheritance tax liability is incurred, for example, just £3,000 per year, or unlimited amounts of small gifts under £250.

The key exemption to this is known as the seven-year rule, with money or assets given away usually fully exempt after that time period has passed. If you die before the seven years are up, inheritance tax is levied on a sliding scale – starting at the full 40 per cent if it’s within the first three years.

You are in the fortunate position where you may also be able to give away money from surplus income outside of the IHT net – this is something that professional financial advice would help you plan.

Instead of thinking you may have left it too late, you may want to consider making substantial gifts now and get the clock ticking on them. It sounds like you are in good health, so hopefully you will live long past the seven years. 

Inheritance gifts: The seven year rule
Years between gift and death Inheritance tax rate paid
Less than 3 40%
3 to 4 32%
4 to 5 24%
5 to 6 16%
6 to 7 8%
7 or more 0%

While you may be loathe to gift money without there being a specific purpose in mind, your children and grandchildren are likely to face significant milestones soon enough – whether they need to move home, renovate their house, buy a car, get married, or pay for other life events.

With your grandchildren being teenagers, it is likely that they might be heading to university or moving out before long, and your help could make a real difference with that.

Aside from making gifts, you may want to consider other ways in which you can reduce the eventual income tax bill. Investments in a pension sit outside of inheritance tax, although your beneficiaries would face income tax on any money they withdrew – and the rules could change.

When it comes down to making the most of your own money now, your daughter has the right idea. 

While you may not want to splash out on business class plane tickets, taking your family on a holiday, or treating them to meals, days out and other family events, may prove an enjoyable and worthwhile use of your money.

These are things that both you and your family get to benefit from it and will hopefully create happy memories that last their lifetimes.

With such a large estate, and potential for a huge inheritance tax bill, the best option for you is to consult a financial planner, who will be able to shed light on how best you can plan for the future.

I spoke to two financial planners to find out what the best course of action is for you to ensure that you can leave as much as possible to your family.

How big an IHT bill do you face? 

Quality time: Rosie Hooper says spending on a family holiday can also leave a legacy

Quality time: Rosie Hooper says spending on a family holiday can also leave a legacy

Rosie Hooper, chartered financial planner at Quilter Cheviot, replies: Though you may be worried you have left inheritance tax planning too late in life, something is always better than nothing and there are still plenty of steps you can take to ensure you are able to leave as much to your loved ones as possible.

As your wife has sadly passed, the value of your home will be included in your estate for inheritance tax purposes. 

Assuming your wife did not use her nil rate band (NRB) or residence nil rate band (RNRB) and left everything to you, you will have £650,000 NRB and a tapered £50,000 RNRB available. 

The RNRB is tapered given your estate is worth more than £2million, however, if your entire estate is worth more than £2.7m at the time of your death, this RNRB will be lost entirely.

At present, this leaves £1.9m of your estate liable to IHT, resulting in a £760,000 IHT bill. 

However, this does not account for any growth in the value of your home or your investments and does not include other assets such as the value of your business, cars, household contents or personal effects, among other things, so the amount payable is likely to be higher.

How to cut your inheritance tax bill 

While this IHT bill is significant, there are things that you could do to mitigate it with careful planning. 

Firstly, you should seek professional financial advice to help you complete detailed cashflow planning to see how much money you will require in your lifetime, and therefore how much you can afford to give away. 

Cashflow planning can model scenarios including various life events such as the need for long term care, which can help you better understand how to plan your finances.

As you receive a final salary pension, this will cease when you die, so you may wish to consider building up a new pension pot. 

As you are 77 and still have a £50,000 income from the business, you can make employer pension contributions via your business as there is no age restriction, and you will receive corporation tax relief. 

As pensions are typically outside of your estate for IHT purposes, this could be a very tax efficient way of passing on money to your loved ones.

Giving away excess income 

Gifting money is also a good option, and under the normal expenditure out of income rules there is no limit to how much you can give tax-free, so long as you can afford the payments after meeting your usual living costs and you pay from your regular monthly income. 

This could help towards the living costs of your family members, or perhaps help top up their savings accounts. 

If, for example, you could spare £20,000 of your regular £120,000 annual income after meeting your own living costs, you could give this money away tax free so long as you do so as regular payments.

Spend more on yourself 

Finally, though you express concern at the thought of ‘wasting’ money, I truly believe that spending quality time with your loved ones when you are still well enough to enjoy it is money well spent. 

The suggestion of treating your family to a holiday would be a great place to start. 

Not only will it enable you to make lifelong memories, but it will also mean that less of your money is paid to the taxman. Leaving a legacy does not always have to be financial. 

Enjoying time with your loved ones in life is also an incredible legacy to leave.

Get a picture of where you stand and professional help 

Seek advice: Jonathan Halberda says finding an adviser who specialises in estate planning could help establish your tax liability

Seek advice: Jonathan Halberda says finding an adviser who specialises in estate planning could help establish your tax liability

Jonathan Halberda APFS, chartered financial planner, Wesleyan, replies: You currently face a delicate balance in terms of planning what you want to happen with your assets while looking after your family and reducing your tax liabilities where possible.

If your objective is to minimise your inheritance tax bill, then the good news is that there are a number of options that are available to you.

As you have mentioned, it is common for parents to be reluctant to simply gift money outright to children without a particular purpose.

One alternative could be to begin ‘capping’ the value of your estate by regularly moving assets into a trust, which then sits outside your estate and is therefore exempt from inheritance tax if carried out in a particular way.

To qualify for this, you should be able to maintain the same standard of living that you enjoy now and not allow any such regular savings to impact your present lifestyle.

Other strategies may include a lump sum savings plan set up for the benefit of your family, where you retain control but lose access, as well as making the most of the annual tax-free gift allowances.

To quantify what your inheritance tax liability looks like and all the inheritance tax planning options available to you, you should in the first instance contact a financial adviser who specialises in estate planning.

You can then make a plan together that considers any unknowns that might occur, such as care requirements in the future.

Your adviser will be able to guide you through these areas, including a plan for your ongoing business, which will depend on how your company has been set up but may offer further options.

Without such a plan, bringing monies into your estate will contribute further to your tax liability.

An adviser will also be able to allay any fears you may have about your obligations; there’s a common misconception, for example, inheritance tax must be paid on the family home if it’s worth more than £325,000. 

There may be additional allowances such as the Residence Nil Rate Band, but this is tapered after the estate value exceeds £2 million.

With an experienced adviser in place, you can rest assured that there are options available to minimise your tax liabilities and the impact on your family.

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