Inheritance Tax is a tax charged by the Government on the value of a person’s estate at their death. The estate will include your home and contents, car, jewellery, savings and investments. Inheritance Tax is charged at the rate of 40%.
Do most people have to pay Inheritance Tax?
The first £325,000 of a person’s estate (known as the “nil rate band”) is not charged to Inheritance Tax. If an estate is worth less than £325,000, no Inheritance Tax is payable.
The sum of £325,000 (or £650,000 combined) may be increased to £500,000 (or £1,000,000 combined) under certain circumstances using the new Residential Nil-Rate Band (see below).
If I leave my whole estate to my husband/wife, will Inheritance Tax be payable?
A gift between spouses or civil partners is exempt from Inheritance Tax. If the estate of a married couple/civil partners exceeds £650,000 tax will usually only be paid on the excess provided the necessary claims are made to HMRC within the appropriate time limits.
Residential Nil-Rate Band
If you are a property owner and are planning to leave your home to your children, your estate may benefit from an additional tax-free amount under the Residential Nil-Rate Band which came into effect on 1st April 2017.
Not every estate will qualify for this, but it is likely to be a significant benefit to those which do.
Please click here for full details on the Residential Nil-Rate Band.
Protecting your children’s inheritance
Family structures nowadays can be quite complex, and issues may arise when both parties in a second marriage have children from previous relationships. What is the best way for them to look after each other and also to ensure that their own children ultimately benefit?
Please click here for information on how you may protecting your children’s inheritance.
Have you minimised your inheritance tax liability?
If you have assets of over £325,000 then your family and other beneficiaries may be faced with a bill for inheritance tax (IHT) subject to the new Residential Nil-Rate band.
There are a number of steps that you can take to protect your estate and minimise the amount of inheritance that will have to be paid. Having a professionally drafted Will is one such step that you should consider.
IHT is charged on the value of estates left when people die. Currently, the first £325,000 of value is allowed to pass to beneficiaries free of tax, with IHT being charged at 40 per cent on anything over that amount.
The use of Trusts to reduce IHT liabilities
Please click here for an article on the use of Trusts.
Can I gift assets during my lifetime to reduce the size of my estate on my death?
You can make a gift during your lifetime; however if you die within 7 years of making the gift, its value is added to the value of your estate on death. You will also need to consider whether there is a potential Capital Gains Tax liability when deciding whether to make a gift.
Are there any exemptions to the “Seven year rule”?
Yes, there are a number of exemptions. You can gift in total up to £3,000 each year (known as the annual exemption). You can make gifts of up to £250 to different individuals. If your child gets married you can make a gift of £5,000. There are other exemptions which may be relevant to your individual circumstances.
The above is an outline of how Inheritance Tax works. If you are concerned about Inheritance Tax we strongly advise that you obtain tax planning advice that is tailored to your personal and financial circumstances.
The benefits of marriage
Please click here for a light hearted but very practical look at the tax benefits of marriage
If you plan to take advantage of the new Residential Nil-Rate Band, then it is important to ensure that you do not fall foul of the tapering law.
However, if the estate of the person leaving the property to the children is over £2m, then this new RNRB is tapered away, at a rate of £1 lost for each £2 left over £2m. This can be addressed by careful tax planning, but testators who do not take advice may leave their beneficiaries with an unnecessarily large tax bill.
Do you have business or agricultural assets?
Assets such as farmland, AIM listed trading stocks and shares in a family business can attract IHT reliefs of up to 100 per cent. If these assets are put into a trust structure within your Will this allows you to crystallize the tax relief at the earliest opportunity. This is very important if there is a chance that the asset may be sold by your surviving spouse and turned into cash before their death as the relief would then be lost.
Do you have property assets with development potential?
Land with development potential can create a problem for surviving family. The real value only kicks in once planning permissions are granted, and what if this occurs after you die and the asset has passed to your spouse? Suddenly they may have an estate worth well in excess of the IHT threshold. Placing the land in a trust through your Will ensures that any increase in value is contained within the trust rather than within the estate of your spouse.
Do you wish to support a charity?
Since 6 April 2012 a reduced IHT rate of 36 per cent applies if more than 10 per cent of an estate is left to charity.
Gifts to charities have always been free of IHT, and they can therefore be utilised as part of your overall tax planning structure, as well as being a way to support causes that are important to you. If you do not have family to remember in your Will, or if you have made ample provision for them during your lifetime, then you could consider leaving a sum equal to the Nil Rate Band to non-charitable beneficiaries (currently £325,000 or £650,000 if you were widowed), with the residue left to charities. Your estate will pass tax free, and you will be helping a good cause too.
Inheritance Tax for the Chinese Community
We were delighted to be invited to give a talk on Wills, Lasting Power of Attorney and Inheritance Tax to members of The China Club, which is a meeting place for Chinese nationals living in the area,
The talk was jointly presented by Catherine Crabtree, of Thomas Dunton, and translated into Chinese by Mrs Kit Leung.
Please click here for a full transcript of the talk plus videos, in both English and Chinese.
For further advice
There are many other opportunities to reduce your IHT liability by planning during your lifetime but of course, any inheritance tax planning is dependent upon your circumstances. The important point is that if you do not take advice from specialist advisors, you may miss out on opportunities to save your estate money, and to ensure that your beneficiaries inherit as much from you as they can.