How you can avoid the pinch of Inheritance Tax when dealing with terminal illness

When a loved one is facing a limited life expectancy or terminal illness, finance is naturally going to be one of the last things that any family member wants to think about. However, it is an unnecessary hit for that person’s legacy and can be easily avoided by planning ahead. After all, wouldn’t you want to do everything in your power to protect the money and estate that your loved one worked so hard for?

Speaking on the subject, Sandro Forte, the co-owner of Frisk and managing partner of Forte Financial LLP, says: “There may come a point, normally with the diagnosis of a terminal illness, when sadly the timetable for the rest of our life becomes clearer.

“As a result, the likely IHT (Inheritance Tax) payable on our death can be calculated with greater certainty and the amount which, perhaps, might safely be given away can be quantified.

“Conversely, the circumstances that bring such certainty may render next to nil the chances of our surviving the seven years required for the value given to drop out of account for IHT purposes.

“That said, there exists quite a raft of potential last minute tax planning opportunities.”

Get married (or enter into a civil partnership)

If an estate is left to a long term partner, there will be a charge to IHT after a death and then subsequently again when assets are passed down to children, for example.

However, if a marriage takes place, the estate in its entirety will pass to the spouse tax free (known as  the spouse exemption) even if death occurs just days after marriage.

Invest in assets qualifying for IHT relief

There are certain businesses and agricultural assets that attract 100 per cent relief from IHT after two years of ownership. This could be something to consider if surviving the two years seems feasible opposed to the standard seven years.

There are a number of investment choices that qualify for relief but Sandro says that it’s imperative to take expert advice because the attractiveness of the relief needs to be considered against the degree of investment risk that needs to be accepted.

Make gifts to take your remaining estate below £2 million

People have previously found themselves within the IHT net simply because of an increase in their property values. Now, the Government introduced the additional ‘Residence Nil Rate Band’ which adds an extra £175,000 (for those who qualify) to the Nil Rate Band of £325,000.

This means that the estates of a married couple on the second death, may benefit from a total nil rate band of £1million, provided that the estate contains a home (or the proceeds of sale of a home if the couple/survivor had downsized or, perhaps, sold up and moved to a nursing home) – and that home is left to ‘qualifying descendants’.

The available Residence Nil Rate Band tapers off once the net estate on death exceeds £2 million. So, it could be beneficial for lifetime gifts to be made shortly before expected death to bring the estate down to a level where the full Residence Nil Rate Band can be claimed. Substantial tax savings will then be achieved even though the gifts themselves remain chargeable when it comes to IHT.

The Residence Nil rate Band is calculated by reference to the net estate. Where gifts of assets in the estate aren’t possible (perhaps the only asset in the estate is a house worth over £2 million), there’s nothing to stop you borrowing money and giving that borrowed money away to reduce the net value.

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