Avoid paying inheritance tax
Nowadays, married couples and civil partners can effectively double the value of the IHT-free threshold to £650,000 when the second partner dies. This can be achieved by transferring any unused allowance on the death of the first spouse, or partner, to the second.
There are also certain gifts you can make during your lifetime, or as part of your will, which automatically escape it.
We all have an annual exemption of up to £3,000 which won’t be subject to IHT on death. If you don’t use your IHT free allowance in one year, you can carry it over to the next, and this amount can be given away in one go, or as a number of separate gifts. You are also entitled to a small gifts exemption of £250, which you can give to as many different individuals as you like without triggering IHT.
Any regular gifts made from your post-tax income, rather than capital, are also exempt as long as they allow you to maintain your normal lifestyle. This includes monthly payments to someone, or gifts for Christmas and birthdays.
Another exemption applies to wedding gifts. Parents can each give their children cash or gifts worth of £5,000 when they get married, or enter into a civil partnership. Grandparents can make gifts up to £2,500, while anyone else can gift a maximum of £1,000.
Although ‘pre-inheritance’ is relatively new jargon, it refers to any gifts made to avoid or reduce IHT during your lifetime - rather than on death - beyond those we have already talked about.
The rules on pre-inheritance - or what is technically known as a potentially exempt transfer (PET) - are pretty simple: any gifts you make to anyone will be IHT free as long as you survive for seven years after making them. If you die before seven years has passed, the value of the gift will be added to your estate and used to calculate the IHT owed to the taxman.
If you pass away between three and seven years of making the gift, it’s value will reduce on a sliding scale for IHT purposes. (Check out this section from the HM Revenue & Customs website to find out more.)
The only proviso is that you must not retain an interest in the gift for the exemption to apply. For example, if you give away your home, but continue to live in it rent free, it won’t count as a PET
3 – Slash your Capital Gains Tax bill
The CGT allowance of £10,100 is per person, so it may be a good idea to hold assets jointly with your spouse, allowing you to realise a profit of up to £20,200 before a CGT charge is triggered.
If you own an asset solely where the profits on sale would exceed the allowance, you could gift half of the asset to your spouse, and then use each of your allowances to reduce the amount of CGT payable.
Bed & ISA
You could try the 'bed and ISA' trick, for example, where you sell the assets on the last day of the tax year and then repurchase them the following day within an ISA wrapper. The 30 day waiting rule doesn't apply when the assets are bought in this way. But you are restricted by the limits of the ISA allowance.
Similarly, you can make the most of your CGT exemption by selling assets and realising a gain up to the value of the allowance. Then, to get around the 30 day waiting rule, your spouse purchases an identical investment and transfers it back to you without creating a capital gain or loss for either of you.
Again this is just another way of realising a tax-free gain, and raising the purchase price of your assets to reduce your CGT liability later on.
Don't forget everyday investors can easily shelter investments from CGT by using their ISA allowance every year. Even if the value of your ISA rockets into the stratosphere, when you come to sell up there won't be any CGT to pay. It's looking like CGT rates could rise in the future, which means it's a good idea to invest as much as you can in ISAs to protect your gains from tax.