Inheritance Tax Planning
What is Inheritance Tax?
Inheritance Tax (IHT) is a tax on the estate of someone who has passed away. It takes into account all of your property, possessions and money, such as:
- Bank accounts
- Your home(s)
- A payout from an insurance policy
- Jointly-owned assets
- Art and jewellery
It applies to the value of your estate in excess of £325,000, which is the standard Inheritance Tax Nil Rate Band (NRB). However, if you leave your home to your children or grandchildren, the Residential Nil Rate Band (RNRB) increases your overall allowance to £450,000 (2018-19). The RNRB is set to increase in 2019-20, and again in 2020-21. IHT is charged at 40% on your estate above the NRB and RNRB, and after the various reliefs available.
Your Executors – the people dealing with your estate – must pay IHT to HMRC.
Inheritance Tax can cost your family a lot of money. We can advise you on how to keep more for yourself and your loved ones with a Tax Planning Report. Don’t let your family lose out to the taxman – read our tips below, and contact us today.
What are the exemptions?
There are many exemptions to IHT. Effective planning could save your family thousands of pounds. You need to think ahead as soon as possible, as exemptions can take years to be applied.
Leaving your estate to others
Legacies – gifts in your Will – to the following are exempt from IHT:
- A spouse or civil partner
- The nation
- A charity
- A political party
The rate of IHT is also reduced to 36% if you leave at least 10% of the net value of your estate to charity.
Your spouse or civil partner may inherit any unused NRB and RNRB. This means that their NRB and RNRB could be £900,000 (2018-19), and eventually £1 million (2020-21), following increases to the RNRB.
If you are UK domiciled, you must pay IHT on assets held worldwide. You come under this category if you have lived in the UK for 15 of the last 20 years, or have had a permanent home in the UK at any time in the last three years. However, if you are not UK domiciled – your permanent home is abroad – you only have to pay IHT on your UK assets.
Excluded assets include overseas pensions, and foreign currency accounts with the Post Office or a bank.
Business Relief reduces the value of a business or its assets for IHT purposes.
You can get 100% Relief on:
- A business, or interest in a business
- Shares in an unlisted company
You can get 50% Relief on:
- Shares controlling more than 50% of the voting rights in a listed company
- Land, buildings or machinery owned by the deceased and used in their business
- Land, buildings or machinery used in the business, and held in a Trust which it will benefit from
You can only receive this relief if the deceased owned the business or asset for at least two years before their death.
If your estate includes a farm or woodland, you may be able to get Agricultural Relief. This means some agricultural property can be passed on, free of IHT.
The type of property that qualifies for this is usually land or pasture used to grow crops, or rear animals, intensively. It also includes farm buildings, stud farms and some agricultural shares and securities. Our Tax Planning Report service can identify how to maximise on this, as well as other reliefs.
The Annual Exemption is £3,000 (2018-19), which means you can give away a total of £3,000 in gifts every tax year without them being subject to IHT.
You are able to carry over unused Annual Exemption from one tax year to the next – up to £6,000 – but you have to use up the whole allowance in the second year.
You can also give these away without incurring IHT:
- As many gifts as you like of up to £250 per person in a tax year, if you haven’t used another exemption on that person
- Wedding and civil ceremony gifts – up to £5,000 for a child, £2,500 for a grandchild or great-grandchild, and £1,000 for anyone else
- Gifts to political parties, national museums, universities, the National Trust, registered housing associations, community amateur sports clubs, or charities
- Payments to help with another person’s living costs, e.g. for a minor or an elderly relative
Small, regular gifts out of your income, which don’t affect your standard of living, are not subject to IHT. But, this can be a complex topic and advice is recommended.
Potentially Exempt Transfers
These are gifts of unlimited value – including property – which are exempt from IHT, if you live a further seven years after giving them away. If you die within this period and they are worth more than your NRB, the gifts become Chargeable Lifetime Transfers and may be subject to IHT. Due to a scale called ‘taper relief’, if they are given between three and seven years before you pass away, the rate of IHT is reduced.
Gifts given in the three years before your death are charged at 40%.
How to save Inheritance Tax
There are several other ways to save IHT.
Family Protection Trust
Gifting part of your estate to a Family Protection Trust during your lifetime can help save IHT on your family’s estates. This is because if you make a gift to your family via a Trust, it doesn’t form part of their estates and you won’t pass on a tax bill.
Protect your beneficiaries’ future with a Family Protection Trust.
Tax Planning Report
Many tax planning strategies may apply to your estate and save you significant sums on IHT. They include reviewing your Will to make sure it is tax efficient, and using tax-saving products and investments. These require professional advice, so we recommend a Tax Planning Report if your estate is likely to be subject to IHT. The greater the amount at stake, the more important this becomes. IHT is in many ways a voluntary tax, paid by those who fail to plan in time. Don’t leave it too late.
Although taking out a life insurance policy won’t save IHT, it can make it easier for your family to pay the bill. And, it could protect your home from being sold to pay for it.
You will need to put your policy into a Trust to use it to reduce your IHT. You could dedicate a portion of the payout to the IHT bill, or the entire amount. This can also make the payout quicker than usual, as beneficiaries don’t have to wait until probate is granted before they can receive it.
How we can help
Issues around Inheritance Tax can be confusing. Our expert team can guide you to make the best decisions, by writing a Tax Planning Report tailored specifically to you and your situation. Let us help you leave as much of your estate as possible to your beneficiaries. Contact us to learn more about this service.