How to avoid burdening your heirs with inheritance tax

published 31 October 2005

Gordon Brown has been making it much harder to avoid inheritance tax (IHT), particularly for those who own property that has risen in value, says Tax Tips & Advice. If the value of your house is over the IHT threshold of £263,000, your heirs will be liable to pay 40% on the difference.

You can get around this by giving away the property before you die (although schemes that allow you to remain living there are under scrutiny) and, as long as you survive for seven years after the gift, no tax is payable on your death. But timing is vital, especially if you still need income.

There is another option. If your children have set up their own businesses, you can invest a lump sum, and as long as you survive for two years, there will be no IHT liability on it. This is because it will qualify for business property relief (BPR) even if you don't take an active role in the business. The assets that qualify include an unincorporated business or share in a partnership, or a share in an unquoted firm (whether or not it gives control). If you buy a controlling interest in a quoted company, you can get BPR at 50%.

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The other advantage to this scheme is that you can earn income on your gift by way of dividends from the company, or profit share from the partnership you've invested in. It is one of the few instances where it is possible to give money away and directly benefit.

Sorry to make Monday mornings back in the office more gloomy, but did you know that in an average week you won't be earning any money for yourself until 9.31am on Wednesday? asks Graeme Wilson in the Daily Mail. And next year, a rising tax burden means that in an average working week of five eight-hour days, including a half-hour lunch-break, the average worker's weekly tax bill will only be paid off at 9.43 am on a Wednesday.