Inheritance Tax Planning
Many people leave their estates vulnerable to hefty tax bills upon their death as a result of their failure to minimise the impact of Inheritance Tax. All of your assets up to the value £325,000 are exempt from Inheritance Tax, this is known as the Nil Band Rate. However, beyond this threshold Inheritance Tax is charged at 40% of the remaining value of your assets. Failing to adequately prepare for this can result in depriving your family and loved ones from their full inheritance upon your death.
Your estate is made up of your home, any other property you own, any possessions you have, investments, bank accounts and many other things that you may have a share in.
At PA Duffy and Company, we advise our clients on a wide range of steps that can be taken to reduce the impact of Inheritance Tax. For example, recent changes to Inheritance Tax in 2017 has made it more beneficial for an estate including a family home to be transferred to children or grandchildren. In some instances, this transfer will be tax free.
An important thing to consider is that gifts to charity and to a spouse are exempt from Inheritance Tax. However, it should be noted that whatever you leave to your spouse will inevitably increase the value of their estate and will potentially result in a tax liability upon their death. This will depend on the value of the estate, but legal guidance should be sought before making any such transfer.
A key consideration in Inheritance Tax Planning is the effectiveness of your will. A well written will can provide a basis for minimising the amount of Inheritance Tax payable upon your death. Our expert solicitors will advise on a range of will writing methods that can help to achieve this. For example, the inclusion of discretionary trusts can help to significantly reduce the impact of Inheritance Tax on your estate. It is important to continue to review your will as your circumstances change, particularly if you get married or divorced.
Other exemptions include agricultural property relief and business property relief. These only apply in limited circumstances and our expert solicitors can advise you if your assets will qualify for exemption.
If you feel your may have a potential Inheritance tax (“IHT”) liability given the size of your Estate, it is worthwhile consulting with your Solicitor and Tax Advisors to look at measures to minimise any liability.
Several measures can be explored to manage your personal finances and assets effectively as part of wider Estate planning exercise. Some are more complex and require appropriate advise such as putting assets into various types of Trusts etc, however there are basic Estate planning opportunities which are outlined below.
Make use of your Annual Exemptions and Allowances
If you are concerned about planning for IHT then this is often the best place to start. Very broadly speaking, the value of a gift such as money or property will still be treated as part of your Estate for the purposes of calculating IHT for any gifts within the 7 years prior to the date of death. This is known as a potentially exempt transfer (“PET”). However, there are some exemptions to this rule and some annual allowances, which enable you to gift assets in the knowledge that the value will immediately be brought outside of your estate for IHT:
Provided both are domiciled in the UK, gifts between spouses are always exempt from IHT, no matter the value of the transfer;
Gifts to qualifying charities and political parties are also exempt;
An individual can make unlimited small gifts of up to £250;
Individuals can make gifts totalling £3000 per annum and can also carry over an unused allowance from the previous tax year;
Wedding/Civil Partnership exemptions enable a parent to gift £5,000, a grandparent to gift £2,500 and any other individual to gift £1,000 to a couple getting married or entering a Civil Partnership.
In addition to the above exemptions and allowances, there is a further exemption for IHT Accounts which is normal expenditure out of income. Where an individual can establish a regular pattern of giving, which comes only from excess income and not from capital, and which enables them to maintain their usual standard of living, then these gifts would not be considered as PET’s for IHT purposes. It is certainly worth some consideration where an individual has the means to achieve it.
Other available Reliefs
Agricultural Property Relief (“APR”) and Business Property Relief (“BPR”) apply to agricultural and business assets which meet certain criteria. For those you who are neither famers nor business owners, it is still possible to take advantage of these reliefs by investing in certain qualifying assets. Expert legal and tax advice should be taken if this is you plan on relying on these reliefs as the criteria needs to be met during the lifetime of the deceased.
Other Lifetime Gifts
Further to PET’s mentioned above, any gifts made outside of the 7 years prior to the date of death will fall outside your estate for IHT purposes.
Review your Will
Make sure your Will is up to date and take advice on how it may be structured so that it is as IHT-efficient as possible.
It is worthwhile to revisit this subject with your Solicitor and Tax Advisors regularly.