The Government continues to raise substantial sums in Inheritance Tax revenue each tax year, collecting an eye watering £5.4 billion in inheritance tax receipts for the 2018/19 tax year.

And although the Government has already received £2.2 billion less this year compared to 2019, highlighting the economic slump, it goes to shows just how important this tax is to the Government in its need to bring in revenue each year.

There is even some speculation that Inheritance Tax could rise as part of the Government’s need to claw back much of the money spent on propping up the country in the wake of the Coronavirus outbreak. The fact is that the rate at which Inheritance Tax was charged, was raised to a huge 80% after the second world war, which some people are drawing comparisons with the current crisis.

Although this is all just rumour and speculation at this point, it shouldn’t be ignored as there are already many things you can do now, that could minimise the IHT bill for your estate. So why wait.

More families are being pushed over the current Inheritance Tax threshold of £325,00, due – in the main – to increased property prices. This means that now is a good time to ensure your wealth is passed down to your loved ones and not into the hands of the taxman.

Understandably, Inheritance Tax can be an emotive subject, which means many of us don’t want to think about it much less discuss it until much later in life, if at all. But you do have alternative options that help to protect your legacy.

Inheritance tax is chargeable on estates worth more than £325,000, or if you are married or in civil partnership a combined £650,000. The current rate of 40% Inheritance Tax is payable above this threshold although property passed to direct descendants can total up to £500,000 or £1million for married couple or civil partners.

And there are ways you can actually benefit from the current climate and fall in the markets that could help to preserve wealth.

How falling markets can help preserve more of your wealth

With the recent shocks to the stock market and subsequent falls following the global pandemic, there could be a benefit to passing on your wealth now in a tax-efficient way to your family and loved ones.

Gifting investments

When considering passing down wealth to your loved ones there are many options available but one of the more simple approaches is gifting over your lifetime.

Gifts will immediately reduce the value of your estate for Inheritance Tax purposes, benefiting your loved ones now as well as later down the line.

You can choose to gift any asset but these tend to include cash, property or investments.

As Inheritance Tax is calculated based on the value of the asset at the time the gift was made, now could be a good time to gift assets, such as investments, that may be substantially lower value than they were earlier in the year when many of us had probably never heard of Coronavirus and before the crisis took hold.

By gifting now while markets are down and assets are cheaper, it means that your beneficiaries may hopefully benefit from any market recovery if they hold onto the investments for the longer term.

In each tax year, you have an annual gift allowance of £3,000 and can give away assets or cash up to this value without it being added to the value of your estate for Inheritance Tax purposes on death.

You are also able to carry forward any unused allowance from the previous tax year, to enable you to make a larger gift. This may be particularly attractive for couples who have not previously used their allowances, as they could make a joint gift of up to £12,000 which will be immediately outside of your estate for Inheritance Tax purposes.

Gifts in excess of the annual allowance will potentially be subject to Inheritance Tax should you die within seven years of making the gift.

This type of gift is known as a potentially exempt transfer (PET). There is no limit on how much you can gift under these rules however the catch remains that you must survive seven years for such a gift to be wholly exempt from inheritance tax.

It is important to remember that we all have an Inheritance Tax nil rate band, currently set at £325,000. The value of your estate up to this limit will not be liable to pay Inheritance Tax and those gifts made up to this figure but falling within seven years of death would also not find themselves liable to pay tax if the overall estate remains lower than the allowance.

However, tax will be due on anything above the nil rate band amount, at 40%.

There could be a capital gains tax too

Typically, gifting investment holdings to anyone other than a spouse or civil partner is considered to be a disposal for capital gains tax purposes.

This means you would need to pay tax on any gains you made since you bought the investments that were in excess of your capital gains tax allowance of £12,300.

Given the fall in investment markets, this capital gain on your investments will likely be much lower currently and you could pass on more of your wealth tax efficiently and potentially limit any capital gains tax liability.

You may also realise capital losses which can be set against any future capital gains.

If you’d like to learn more about Inheritance Tax planning and how you can protect more of your wealth for your loved ones contact us and we can arrange for a meeting with one of our expert advisers.

We’re also offering all those with £100,000 or more in savings, investments or pensions, the opportunity for a retirement review worth up to £500. Do you know when you can afford to retire? It could be sooner than you think. Contact us for more information.

Please note that the Financial Conduct Authority (FCA) does not regulate cash flow planning, estate planning, tax or trust advice.

The value of your investments can fall as well as rise. You may not get back what you invest.