Inheritance Tax: Making Sense of It All

With house prices rising, it’s not surprising that more and more families are being stung by inheritance tax (IHT). More than £3.1billion was levied from estates in IHT in the last year, a figure 8% higher than the year before.

We have put together some tips to try and make sure you put in place the proper estate planning.

1. Write a Will

Writing a Will is always a good place to start when estate planning as it will not only make sure your wishes are carried out but also that your affairs are dealt with in a tax-efficient way. Without a Will your estate will be dictated by intestacy rules which may not be in your family’s best interests. Those who are unmarried and without children, but who have considerable assets should make writing a Will a priority since under the rules of intestacy their estate would pass to their parents (rather than brothers or sisters), potentially increasing their IHT liability.

2. Check you have an IHT liability

It is worth getting to grips with the rules of IHT and understanding when it actually applies. Each individual has a nil-rate band, a tax-free allowance of £325,000. IHT will only apply to an estate with a value above this at a rate of 40% on death.

Transfers between husband and wife however, are exempt from IHT and if the nil-rate band is not used on the first death, this then means that the value of the estate upon the second death will be exempt from double the amount (£650,000).

3. Look into possible exemptions

You are able to give away up to £3000 a year under your annual allowance which is immediately exempt from IHT. You are also able to give up to £250 to as many people as you like under the small gift exemption provided the recipient does not receive any other gifts from you during that tax year. Wedding gifts up to the value of £5,000 for parents, £2,500 for grandparents and £1,000 for everyone else are also eligible as are donations to qualifying charities.

A gift of assets or cash which exceed the annual allowance are known as ‘potentially exempt transfers’ and be exempt as long as you survive for seven years from the date of the gift.

4. Make gifts out of excess income

‘Gifts out of income’ can be made free from IHT. In order for a gift to qualify for this exemption it must form part of normal expenditure, be made out of income and cannot reduce your standard of living. Executors of your estate will claim this exemption so you must keep a good record of both your normal expenditure and of gifts made; these will have to be declared to the Revenue.

5. Ascertain what assets you have that could be given away free of Capital Gains Tax

You could be exempt from Capital Gains Tax (CGT) if you hold assets such as property or quoted shares which have fallen in value since purchase.

Should the value of the gifted asset recover it would then accrue in the estate of the recipient and could be a potentially exempt transfer and so outside of the estate after seven years.

6. Take out life cover

Whole-of-life insurance policies are a way of providing funds to pay any IHT liability these will need to be placed in trust so they are not an asset of your estate. These policies are in place to pay a sum equal to the tax liability into trust where the money would be exempt from IHT. The sum would then be available for beneficiaries to pay the tax due. This will happen immediately following death and the funds would then be available to pay the tax without the need to wait for grant of probate.

7. Consider using Trusts

When using discretionary trusts you are able to gift an individual an amount up to the nil-rate band per individual (double the amount for a married couple) and you can repeat this every seven years.

If you were to gift more than this amount into a discretionary trust then the allowance would incur a lifetime transfer tax of 20%. A CGT rollover is allowed on trusts, continuing control over the assets, and offering protection from beneficiaries or those claiming through them, such as creditors or former spouses.

8. Preserve access to income

The ‘gift with reservation of benefit’ rules prevent an asset being given away during a person’s lifetime whilst allowing continued use or enjoyment of that asset, such as a painting. For example, should the painting owned by Sarah be given to her daughter, it could not continue to be hung on Sarah’s wall, she would be still deemed to own the painting.

Specially designed, discounted gift trusts could be a way to preserve access to income while gifting the right to assets. This type of trust will provide an immediate IHT saving on gifts, with the remaining capital being exempt after seven years while retaining a right to income.

9. Look into business property relief

With careful advice and planning you may be able to invest in certain discretionary management services that provide investment into unquoted companies.

Those with a business should find out if they qualify for 100% relief under the business property relief rules.  Has the business interest been held for two years? Are the majority of the assets in the business used for trading purposes? Is the business a trade or an investment?

10. Contemplate making gifts to charity

Many people make gifts to charity in their Will. These gifts to charity are exempt from IHT if you give under 10% of your net estate (the total estate value less the £325,000 nil-rate band). The rate of IHT that applies to the remaining estate then falls to 36% instead of the usual 40%.

If you are concerned about your estate or have any other queries regarding any of the issues above contact Rosalind Watchorn Solicitors today to discuss your situation with a member of our specialist will-drafting and later-life planning team. Telephone 0114 229 0160 to arrange a free initial appointment with one of our solicitors.