Inheritance Tax Planning
When should I plan for IHT?
When you die, IHT will be charged on your personal wealth, together with all or a proportion of your lifetime gifts made in the preceding seven years.
IHT is currently payable where a person’s wealth is in excess of £325,000 (2018-19).
If you own your own house and have some savings, life assurance policies, or business assets, your estate could be liable.
The full rate of tax is 40%, but this is reduced on a sliding scale for gifts made between three and seven years before your death.
Most gifts made during your lifetime will be entirely exempt from IHT if you live for seven years after making the gift.
Main residence nil-rate band
A transferable nil-rate band has been introduced in order to take the family home out of IHT for all but the wealthiest. This will apply when a main residence is passed on death to one or more descendants (including a child, stepchild, adopted child or foster child) of the deceased and their descendants.
The value of the main residence nil-rate band for an estate is the lower of the net value of the interest in the residential property (after deducting any liabilities such as a mortgage) or the maximum amount of the band.
The qualifying residential interest is limited to one residential property but personal representatives are able to nominate which residential property should qualify if there is more than one in the estate. A property which was never a residence of the deceased, such as a buy-to-let property, will not qualify.
The allowance takes effect for relevant transfers on death on or after 6 April 2017. It will apply to reduce the tax payable by an estate on death; it will not apply to reduce the tax payable on lifetime transfers that are chargeable as a result of death. It has been set at £125,000 for 2018-19, rising by £25,000 annual increments so that it reaches up to £175,000 for 2020-21.
This nil-rate band is also available when a person downsizes or ceases to own a home on or after 8 July 2015, and assets of an equivalent value (up to £175,000 in 2020-21) are passed on death to direct descendants.
How does IHT affect my business?
A business you control will attract business property relief of 100%. In other words, your business can be passed on with no IHT being paid.
Assets owned by you but used by a partnership in which you are a partner, or a company you control, attract business property relief of 50%.
Similar reliefs apply to agricultural property.
How to reduce the IHT bill
Transfers of assets between spouses and civil partners are exempt from IHT, but other lifetime gifts may be more tax-efficient.
Lifetime gifts are potentially exempt from IHT, and there is no limit on such transfers, so this is a good way of transferring assets that you do not need to keep in your estate. It may be advisable to cover substantial gifts by insurance against death within seven years.
Trusts let you transfer assets out of your estate for IHT purposes, but enable trustees to exercise some degree of control over the capital or income (and you can be a trustee). There may be an IHT charge, but this would be at 20%, and then only if the transfer is over £325,000 (2018-19).
Life assurance policies (unless designed to cover IHT liabilities) should be assigned during your lifetime so that the proceeds do not form part of your estate on death. The most common assignees are spouses, family members, and trusts.
A reduced rate of 36% applies to death estates where 10% or more of the net estate is left to charity.
Concession for couples
The IHT standard threshold of £325,000 (2018-19) is known as the IHT nil-rate band.
There is an additional concession for married couples and civil partners.
The unused percentage of the nil-rate band from the first death estate can be carried forward and added to the nil-rate band available to the second. The combined threshold for couples is therefore set at a maximum of £650,000 for 2018-19.
It is never too early to plan your estate
If it is large, it could be exposed to inheritance tax at 40%, and if it is small, advance planning can help you ensure that your assets will go to your chosen beneficiaries.
Making a Will
Estate planning begins with the following decisions:
- Who will inherit your assets?
- When should the recipients receive them?
- What limitations will be placed on the recipients?
A Will should also state who is to be your minor child(ren)’s guardian. Although making a Will makes your decision legally binding, the Will can be amended any time if you change your mind.
Your will should then be safely lodged so that others can retrieve it when the time comes.
We can help you to establish your potential inheritance tax exposure and advise on what to do next.