04 Oct Estate planning and Inheritance Tax
Inheritance Tax (IHT) is a tax on your estate when you die, and is also sometimes payable on Trusts or gifts made during your lifetime. This includes the total of everything you own and a share of anything you own jointly.
Your ‘estate’ is basically the things that belong to you or that you own a share in, such as property, investments, insurance, pension payments, and assets like cars, jewellery or furniture. Gifts you have made in the past seven years, or that you still benefit from are included too. For instance a house you have gifted but still live in. As are assets held in a Trust from which you receive personal benefit.
If you own assets jointly, your share of their value is included in your estate.
How much can I leave before IHT affects my family?
There are a number of things you could consider doing to help reduce your family’s IHT bill.
No tax is charged on the value of your estate up to £325,000.
This is also known as the ‘nil rate band’ and everything above that is taxed at 40%.
How much IHT would be payable in the current tax year?
Estate value Inheritance tax bill
Less than £325,000 £0
£400,000 £30,000
£500,000 £70,000
£600,000 £110,000
£700,000 £150,000
£800,000 £190,000
£900,000 £230,000
£1,000,000 £270,000
If your IHT nil rate band is not used up upon death, the unused portion can be transferred to a surviving spouse or civil partner.
Assets passed between spouses or civil partners are exempt from IHT (assuming the spouse or partner is domiciled, or treated as being domiciled in the UK), regardless of worth and how soon you die after making them. These rules also apply to gifts made to charities.
Additionally, any amount of money you give away outright will not be counted for IHT if you survive for seven years after making the gift. If you die within this period, the amount of the gift will be included within your estate but there may be a gradual reduction in the IHT liability on these gifts within the 7 years. This is known as taper relief.
Bear in mind tax laws can change and sometimes even retrospectively. Also, the rules for individuals who are not UK resident or not UK domiciled are different and therefore tax and local laws should be considered by a potential investor.
Main residence nil-rate band
In addition, the government plans to introduce a ‘main residence nil-rate band’ from the 2017/18 tax year starting at £100,000, and increasing to £175,000 in the 2020/21 tax year. This will be subject to a maximum estate valued at £2m.
This will be available if the deceased’s residential property, which has been his or her residence, and is included in the estate, is left to one or more direct descendants on death.
How can I plan for Inheritance Tax?
There are a number of things you could consider doing to help reduce your family’s IHT bill.
- Make a Will.
- Look into exemptions that could reduce the value of your estate. There are a number of exemptions you can use to reduce the value of your estate. For example, moving assets between spouses or civil partners does not create a tax liability. If you leave 10% or more of your estate to charity your IHT bill will also be reduced to 36%.
- Consider gifts – if you can afford to give away some of the assets you own, it may be possible to reduce the size of your estate.
- Think about life assurance – this won’t actually lessen your IHT but the proceeds could be used to help pay the bill on death.
- Trusts – if structured carefully, Trusts could help to reduce or possibly even eliminate your IHT liability.
Tax rules require careful consideration and may not reflect your individual circumstances. The above is based on our understanding of current taxation, legislation and HM Revenue & Customs practice, all of which is liable to change without notice.
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