10 Important Inheritance Tax Need-To-Knows
1. Inheritance tax (IHT) is payable on ‘your estate’ – which is an all-encompassing term.
“The value of your estate for the purpose of IHT includes: your savings; possessions including property; pension funds (certain payments from payment funds may be subject to IHT); the value of any money or property you gave away during the seven years prior to death (subject to certain exemptions). The first £325,000 of your estate is tax-free so the 40% tax only applies to anything that goes over this value.” – the team at Age UK
2. Most people are affected by it in some way.
“Many people underestimate the value of their estate. There is a tax-free inheritance tax allowance of £325,000 (known as the nil-band rate) and this means you can generally pass on anything up to this amount without paying IHT. So, if your estate, including all property, possessions and money, is worth less than this amount then your beneficiaries shouldn’t have to pay IHT.
“However, the combination of a nil-band rate which has been frozen since the 2009/10 tax year and house prices at an all-time high means more people who wouldn’t consider themselves to be wealthy are being caught in the IHT net. IHT is chargeable at 40% on anything over the £325,000 threshold, or over up to £500,000. So, it’s worthwhile working out what your estate is worth. If it’s over £325,000 (or £650,000 if you’re married or in a civil partnership), seek advice to find out whether you could benefit from the residence nil-band rate and what other planning opportunities are available to you.” – Shona Lowe, head of private client services 1825 Financial Planning
3. If you’re married, a will is crucial.
“Many couples assume that they don’t need to worry about IHT. But they may be wrong. First, if you are not married you do not get any kind of special exemption on money left to your partner, so if your estate is worth more than £325,000, there will be a bill. And even if you are married or in a civil partnership, without a valid will IHT may still come into play. If a person dies leaving behind a spouse and children, the rules of intestacy could mean a portion of the estate automatically goes to the children, thus triggering an IHT charge that could have been avoided if the entire estate had passed through a will to the spouse.
“However, it’s important to think beyond what happens when there’s a surviving spouse/partner to leave everything to in your will. If the combined estate value lands with the surviving spouse, they could find they are in the IHT bracket. While that surviving spouse can do their own IHT planning, it can sometimes make sense to include other beneficiaries and trusts in wills to make sure the surviving spouse/partner doesn’t inherit more than they need.” – Shona
4. Even if you give your wealth away, IHT may still apply.
“You can give away as much as you like to individuals with no immediate IHT liability but there may be a liability if you die within seven years of doing so. There are a number of exemptions, and reliefs for business and agricultural property. But, if you’re giving ‘chargeable assets’ like shares or land, there may be a capital gains tax liability. Some points to bear in mind include gifts into trust or to a company can involve an immediate IHT liability, sometimes with more payable if you die within seven years; gifts and bequests to a spouse or civil partner are wholly exempt (unless the recipient is not UK domiciled and the donor is); and gifts and bequests to bodies such as charities and certain UK political parties are generally exempt from IHT.” – the legal team at Shipleys
5. There are some ways of gifting money to loved ones, tax free.
“You can make gifts of up to £3,000 per tax year (known as your annual exemption) to whomever you like. And if you didn’t use this in the previous year, you can carry that forward to give you an exemption of £6,000. A parent can also gift £5,000 to a child when they get married, and a grandparent can gift £2,500. There’s also an allowance of £250 for small gifts to as many people as you like and some other scenarios in which you can gift money free of IHT – such as to charities and political parties.” – Shona
6. Gifting your home to your children is complicated – especially if you live there.
“If you give your home to your children but carry on living there, the Inland Revenue deem this to be a ‘Gift with Reservation’ in that although you have transferred the assets, you have not actually given up your use of it. As such, your estate would be treated as though the asset was still in your estate on death. In such circumstances your children could actually be worse off as the property might rise in value and then be subject to capital gains tax when they sell it.” – the legal team at Leonard Gray Solicitors
7. You can give away excess wealth.
“It is perfectly possible to give away surplus income you might receive which is adding to capital reserves. The Revenue will not treat this as impacting on your nil-band rate allowance and HMRC prefer to see regular patterns of income being given away. After your death it would be the responsibility of your executors to demonstrate that you could afford to give away the excess income without suffering in terms of your lifestyle.” – the Leonard Gray team
8. Trusts and life insurance could be worth investing in.
“A trust can be a useful way to manage assets. It’s a legal arrangement that allows you to ‘give away’ something of value without losing full control of it, and anything placed in a trust won’t be counted as part of your taxable estate when you die. You can contribute up to £325,000 tax free every seven years but remember, this only applies for non-exempt gifts put into trust more than seven years before death. You could also think about taking out life insurance on trust to reduce any impact on your loved ones. It means you can choose who will receive the money from any pay out and as it’s held on trust, it wouldn’t be taxable.” – Emily Deane, technical counsel at STEP
9. Just because you’ve left the UK, it doesn’t mean IHT won’t apply.
“Even if you are domiciled outside the UK, any British assets you own will attract UK inheritance tax. Before 5th April 2017, property owned through a corporate structure (‘enveloped’) was generally exempt, but now all UK residential property is liable, however it’s owned. So, if you hold UK residential property in this way, explore your options for the most tax-efficient way forward. While it is possible to adopt a domicile of choice overseas by severing all ties with the UK, domicile law is extremely complex. Also, new rules could mean that returning to the UK for a relatively short period – say, due to family illness – could reignite IHT liability for non-domiciles. For the best outcome here, seek specialist, personalised guidance.” – the team at Blevin Franks
10. It’s important to talk to those who might be affected.
“We’re often a bit squeamish about talking about our finances, even with those who’ll be most affected by it. But, at some point, we all have to have the money talk. Losing a loved one is difficult enough. Do you want to leave the people you love most to try to unravel your finances and wishes? Getting your family involved early lets them know what to expect when the time comes. You don’t need to disclose every last detail – it can be as simple as reassuring them that you have the basics of estate planning in place: that you have enough money to live on, a valid will, an appointed power of attorney and a list of assets recorded somewhere. It’s also a chance to address any awkwardness, like your choice of executor, who is in charge of distributing assets or why you’ve decided to leave money in trusts rather than gift outright.” – Bruce Pearce, head of advisory services at Hargreaves Lansdown
For more information or advice on estate planning and inheritance tax visit AgeUK.org.uk, 1825.com, Shipleys.com, LeonardGray.co.uk, STEP.org, BlevinFranks.com and HL.co.uk.
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