Forewarned is Forearmed
For many people, inheritance tax (IHT) planning is put firmly to the back of their mind and often left too late to leave time for any realistic planning opportunities.
There are many basic planning opportunities which should be given due consideration now to help minimise your potential exposure to IHT and to ensure your loved ones receive as much of your hard-earned estate as possible.
Do you have an IHT exposure?
The IHT nil rate band for any individual is currently £325,000. If your estate is worth more than this, you may have to pay IHT on the excess at 40%. However, it is possible for a joint estate between spouses of up to £1m to be exempt from IHT.
If you own a property which you have lived in as your home at some point of its ownership, an additional IHT allowance called the residents nil rate band will apply, provided you leave the property to your direct descendants i.e. your children, grandchildren etc. This currently stands at £125k but will increase to £175k by 2020-21. Therefore, up to £500k of your death estate could be exempt from IHT.
Additionally, unused IHT allowances are passed on to surviving spouses on the death of the first spouse. Gifts between spouses are made IHT-free so, if a person leaves all of their assets to their spouse on their death, their IHT allowances will have been preserved, meaning a total of up to £1m of allowances will be available on the death of the second spouse.
Make sure you have a will in place to ensure your assets are passed on to your loved ones as you intend. Dying without a will (intestate) can lead to administrative difficulties when dealing with your estate and your assets may not be distributed as you intend or could even end up with the crown.
Make sure you use your allowances
A person is permitted to make gifts of up to £3k each year which are exempt from IHT. If this allowance is not utilised, it may be carried forward by one year before it is lost.
Gifts can be made to whomever you please, and of any amount, without incurring an initial IHT liability, known as potentially exempt transfers (PETs). These gifts will be brought into your assessable death estate should you die within 7 years of making them, although a tapering relief is in place to reduce the tax payable on them should you die between 3 and 7 years of making the gift.
Further IHT allowances are available each year in certain situations as follows:
• Exempt between spouses
• Exempt for gifts to help with another person’s living costs, such as an elderly or infirm relative or a child under 18
• Exempt on gifts to charities or political parties
• Small gifts of up to £250 per person for any reason
• £5,000 for a gift by a parent to their child on the wedding, £2,500 from grandparents, £2,500 between the bride and groom and between civil partners.
Gifts as income out of expenditure
If you find that you have an excess of income each year after taking account of all general day-to-day expenses, this can be gifted tax-free and will not form a part of your annual gift allowance. You will need to ensure that you are able to maintain your current standard of living and must establish a pattern to the gifts being made i.e. annually, quarterly, monthly etc.
Gift of assets
Assets such as stocks, shares or properties can be gifted away but this is often prohibitive to do so due to a latent Capital Gains Tax ("CGT") applies in certain cases when an asset is sold for more than it was originally purchased. The taxable gain (profit) may be triggered following the transfer of an asset, although commonly this would follow a sale. A number of tax reliefs are available to exempt or reduce the tax that may apply. Basic tax planning may... (Capital Gains Tax ("CGT") applies in certain cases when an asset is sold for more than it was originally purchased. The taxable gain (profit) may be triggered following the transfer of an asset, although commonly this would follow a sale. A number of tax reliefs are available to exempt or reduce the tax that may apply. Basic tax planning may...) liability arising as they will be deemed to have been sold at their market value when gifted to a family member. Consider which assets do not carry a CGT liability or the gains from which will be within your CGT annual exemption (currently £11,700). This can be doubled when both spouses can use their allowances.
Gifts into a trust of up to the nil rate band threshold of £325k can be made IHT-free, per person, and can be repeated every 7 years. This can be an effective planning mechanism to divest your estate and to safeguard the younger generations’ financial future.
It is also possible for assets (property, shares etc.) to be can be transferred into a trust without triggering a CGT liability due to the availability of ‘holdover relief’.
Business Property Relief (BPR)
Assets qualifying for BPR are exempt from IHT and typically include assets used for business purposes or shares in qualifying trading companies. Certain discretionary management services can provide advice regarding investment into such qualifying companies as an effective IHT planning tool.
Legacies to charity
Legacies to charities made in your will are exempt from IHT and will not form a part of your assessable death estate. However, if you give 10 per cent of your net estate (the total estate value less the £325k nil-rate band) then the rate of IHT applicable to the remaining estate falls to 36%.
Take out life cover
One of the simplest ways of providing funds to pay the inheritance tax liability is to establish a whole-of-life insurance policy. This is designed to pay a sum equal to the tax liability into trust where the money is exempt from IHT and will be available for beneficiaries to pay the tax due. The payment of the death benefit will happen immediately following death and the funds will be available to pay the tax without any need to wait for grant of probate.
Don’t leave it too late!
As can be seen, there are plenty of opportunities available to potentially reduce your exposure to IHT but it is important not to leave it too late before considering these. In order to make them as effective as possible, consider actioning these sooner rather than later.
If you would like to discuss the potential inheritance tax planning opportunities available to you, please get in touch with a member of our team.