How to make sure you NEVER have to pay inheritance tax, by veteran estate planner IAN DYALL

Unless you are fabulously wealthy, there is no reason why you should ever pay inheritance tax. You are free to give away as much wealth as you like completely tax-free – so long as you do it in your lifetime and survive for a further seven years.

And if you – understandably – don’t want to hand over everything, there are plenty of allowances you can use to hold on to significant sums and still not lump loved ones with an inheritance tax bill when you pass away.

I’ve been in financial services for 34 years, and the number one reason that grieving families pay inheritance tax is not because of complicated rules or dealing with large amounts of wealth. No – it’s emotional hang-ups.

I see the same pattern in families played out again and again. So often people are plagued with psychological concerns that can have big consequences for their finances.

Roy Jenkins, a Labour Chancellor in the late 1960s, famously described inheritance tax as ‘a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue’.

While there are obvious exceptions to this, Roy was definitely on to something. I hear the same worries again and again.

What happens if I give my money to my adult daughter who then gets divorced and it goes to my awful son-in-law? What happens if my children blow my hard-earned cash on frivolous purchases, such expensive holidays and watches?

Can I really trust my 40-year-old son with a large sum of cash – he is, after all, the same person who wrapped his car around a tree with no insurance at the age of 18?

What happens if I give my money to my children and they put it into their business and the business then folds?

Sometimes people leave their loved ones with an avoidable inheritance bill because they simply didn’t want to think about death – or believed they had longer than they did.

A couple I knew refused to write a will because they worried it would tempt fate.

But inheritance tax is an issue that growing numbers cannot afford to ignore.

Growth of asset values coupled with the fact that the nil rate band, unchanged at £325,000 since 2009, will remain frozen until at least April 2028, means many more estates of relatively modest size are being drawn into the inheritance tax net every year.

Married couples and those in civil partnerships can combine their allowances to pass on £650,000 jointly tax-free. They can also pass wealth between each other tax-free.

Everything over these allowances is taxed at a flat 40 per cent, although there is an additional allowance for passing on a family home worth under £2 million.

There is also no inheritance tax to pay on gifts made from regular, surplus income.

But even when you have wealth in your lifetime that would exceed your allowances, the majority of tax bills can be prevented or diminished by some careful steps in estate planning.

One of the most common hang-ups – and the hardest to overcome –is a fear you will run out of money if you give a large portion away to family while you’re alive.

This is a legitimate concern, and one we as financial planners take very seriously in our planning.

But it is amazing that even ultra-wealthy people worry about this when, frankly, without any complex maths you can look at their estate and see that they are never going to run out of money – even if they need expensive care.

Spending and enjoying the money that you have earned could improve your quality of life and reduce the tax bill on whatever is left when you pass away.

There are clever tricks we can use to get the money out of your estate and earmark it for your children, but still make sure you have access to it if you ever need it. For example, you can leave an inheritance in a trust, some of which allow you to retain some access to the money you’ve given away, while minimising the inheritance tax liability.

If you want to use a trust so that you retain access should you need it, you can only go up to the nil-rate band – so £325,000 (or £650,000 for a couple who are married or in a civil partnership) in any seven-year period. If you’ve got a big estate, or would like to put your home into it, it can make sense to start early in the hope that you have several seven-year periods ahead of you.

You might not need a trust, however. In many cases I see, a desire to keep control that isn’t necessary leads people to use trusts and therefore slow down the process. There can be some other tax

consequences to consider however, and as a generally complex area, trusts are best arranged with estate planners rather than on your own.

People are often worried about giving up control of their wealth. They’ve worked hard all their lives and seen their net wealth rising, so the idea of handing it over to the next generation can be difficult to get their head round.

Sometimes it’s important to put this to one side and really think about when your children will get more benefit from your hard-earned money.

Is it while they are trying to get on the housing ladder in their 20s, when they are raising kids or putting those children through university? Or is it when you die and they are recently retired?

People who are very wealthy sometimes don’t want to transfer wealth to their children all at once while they are young adults as they fear it could remove ambition and drive from their lives. It’s true that too much money too soon can do damage, but sooner or later they will get it.

It’s worth giving children some money early on to see how they cope and get them used to handling it.

If you buy them a house, or give them enough for a deposit, for example, they will still need a job to then afford their lifestyle.

Sadly, I see cases of this every week, where people hold on to their money until they become unwell, and then it can become too late to hand over wealth without the risk of an inheritance tax bill.

There’s no hard and fast rule, but you should begin the process at the time you take your pension – so, for most people, in their mid-60s. You don’t need to take massive steps, but start thinking about it.

For example, you could start to consider what you spend and what you hold on to.

Pensions do not count towards your estate and therefore don’t attract inheritance tax, so it might be a better vehicle for passing on assets than anything else. This means there may be better ways to fund your retirement while preserving your pensions.

There are rumours that the Chancellor might make pensions liable for inheritance tax at the upcoming Budget. If that happens, is it really a disaster?

Well, now you’ve got a preserved pension that you can dip into further down the line, so it’s there if you need care. You can only plan on what you know, after all.

Try to put your emotions to one side – or understand that your psychological hang-ups could cost you down the line.

As told to Jessica Beard

Ian Dyall specialises in trusts, estate planning and inheritance tax. He works at wealth manager Evelyn Partners.