Inheritance Tax

Inheritance Tax, IHT

This overview is for UK domiciled individuals concerned that Inheritance Tax may take a chunk out of their estate on death and want to know what to do about it.

What is Inheritance Tax?

Inheritance Tax is classed as a redistribution of wealth. It is generally thought of as a tax paid by the rich but is catching more families out every year. With careful planning you will be able to reduce or eliminate it altogether. You need to choose the options that suit your own family’s circumstances and you need to do it now whilst you are living.

Who pays Inheritance Tax?

Inheritance Tax is paid by your beneficiaries out of ‘their inheritance’, but it is the Personal Representative of your Estate that is responsible for paying it within six months of your death.

The Nil Rate Band, NRB

Everyone has a Nil Rate Band of £325,000 (currently 2022/23) which means a ‘nil rate’ (or 0%) applies to the first £325,000, IHT at 40% applies above this amount, no limit.

The only exception is if you leave a minimum 10% of the net estate to charity, the IHT rate is reduced to 36%. This is always worth looking at in my book because the result benefits charity in lieu of the HMRC at a small marginal cost.

The Residence Nil Rate Band, RNRB

If you are a homeowner and you choose to leave your home to your children, grandchildren or stepchildren your estate can benefit from the RNRB up to £175,000 (currently 2022/23 and will increase in line with cost price inflation, CPI).

The amount you can claim will be limited to the value of your property, and if your estate exceeds £2 million, the RNRB reduces by £1 for every £2 above the £2M.

Transferable NRB and RNRB

This only applies to married/civil partnership couples, but not cohabiters. Provided they use ‘spouse exemption’ on first death to pass the deceased’s estate to the survivor, the NRB and RNRB of the first to die is unused. It can then be claimed by the Survivor’s estate, so both couples NRB and RNRB are used on second death.

It is possible therefore to set £1 million against the second death estate. If it is practically possible then, keeping your estate value to just under a £1 million is a good thing to do.

What are your options to reduce or eliminate your IHT liability?

All of the options will need careful consideration of the consequences which will be both risk factor based and timeline based. Always keep a record of what you do.

Gifting out of Capital and Income

  • HMRC gives everyone an Annual Gifting Allowance of £3,000 per tax year.
  • You can make small gifts to anyone of £250 per tax year, wedding gifts of up to £5,000, gifts between spouses or civil partners are exempt, as are gifts to charities, political parties and some organisations.
  • Gifts valued over £3,000 are classed as Potentially Exempt Transfers, PET and the seven-year rule applies. The gift is added back to your estate for the following seven years so you will still pay IHT on the gift if you die within that period. A taper relief does apply to the liability in years 4 to 7, and any PET made will come out of your available NRB.

Don’t forget that once a gift has been made, the gift is no longer yours, so only gift what you can afford or think you won’t need later in life. When it is gone, it is gone, so gifting money to (say) a child who will be able to spend it means it is outside of your control. Be wary if your child may get divorced or become bankrupt.

  • Regular gifting out of Excess Income, have a look at the last page of form IHT403 as it explains how to calculate your surplus income. Set up a regular gift to a child and the benefit is it is not classed as a seven-year gift and will prevent your estate from growing any more in the future.

Life Assurance

  • You may choose to set up a Whole of Life assurance policy, they are expensive but can provide your Personal Representatives with the amount of money they need to pay your IHT liability.
  • A Term assurance policy will be cheaper but only run to a certain date. Most policies can be written ‘in trust’ so the pay-out falls outside of your taxable estate.

Other Reliefs and Exemptions

  • Business Relief, BR and Agricultural Relief, AR mean that you can pass on your business or farm provided they qualify (of course) without IHT applying to that asset. You must have owned the BR qualifying asset for two years, there are plenty of other rules that will also apply, better to ask us for more details. One option is to invest money in the Alternative Investment Market, AIM and considering this as part of an overall IHT strategy is a very worthy option.
  • Trusts can also be part of your IHT mitigation plan, whether you gift assets into a trust whilst you are alive or as at the date of death, it is as well to understand the tax and trust management implications from the start, another complicated one I’m afraid so ask us for more details.
  • Equity release is a popular option for many retired couples these days as it releases capital from your home that can simply be spent or gifted away which will reduce the overall value of your estate subject to IHT. It is not a decision to take lightly but again can form part of an overall plan.

Important Point

Think of the bigger picture, the family picture, what about your beneficiary’s estates? How will the inheritance you leave your beneficiaries affect them and will it give them an IHT liability to solve? You can probably solve their problem too, so ask us for more details.

Some good reasons to make a Will

Pretty much everyone is aware that making a Will is the right thing to do. Have you done yours? You may have gone through the reasons yourself at some point but here’s a bit of a recap in any case!

  • You get to decide who benefits and who gets to sort it all out, there may be someone you don’t want involved!
  • Intestacy is dying without a Will and the rules won’t always be suitable! even if you are married or in a civil partnership
  • If you have children, appoint legal guardians for them in your Will, otherwise Social Services will get involved
  • Is someone dependent on you, how would they manage without you? Leave some money for them in trust so their State Benefits remain intact
  • If you are unmarried, your partner will not benefit from your estate whatsoever so you will need to put this right by writing a Will
  • Couples do ‘actually’ get married/enter into a civil partnership for tax purposes, also pensions as well for those later in life

Bottom line is to think of the money, the people and get the right plans in place.

Not all ‘Willwriters’ are the same, we are a fellow member of the Institute of Professional Willwriters, operate to its strict Code of Practice which is approved by the Chartered Trading Standards Institute, so you can be assured of straightforward sound advice.

Contact Us for more information

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