Inheritance tax is often said to be one of the least fair UK taxes. Having already taxed your income once, HMRC asks for another 40% slice of your estate (after allowances) when you die. Fortunately, Inheritance Tax (or “IHT” as it’s commonly known) can often be reduced by careful (and legal!) planning in advance.
Inheritance Tax planning is often left until the time people write their Will. While it’s true that some aspects will only take effect on death and need to be documented this way, there is a lot which can be done in your lifetime. This means that the best way to prevent your loved ones having to pay the hefty 40% bill is to start planning well in advance.
What is Inheritance Tax?
Inheritance tax is a tax on accumulated wealth. It is charged on your estate including property, belongings and savings you leave behind after death if your assets are over a set threshold amount known as the “Nil Rate Band” or NRB.
The current rate of IHT is 40% on assets over the nil rate band of £325,000 if you are single, or £650,000 for married couples and civil partners.
Reliefs & Exemptions
Reliefs and Exemptions are granted to reduce the amount of Inheritance Tax payable under certain circumstances.
Transfers between couples who are married or in a civil partnership are not subject to Inheritance Tax. This means that the first partner to die can leave their entire estate to the other and no tax will be payable. Any unused nil rate band can also be transfer to the surviving partner meaning they can potentially double their nil rate band to £650,000 using the deceased partner’s share. This is known as the “Transferable Nil Rate Band” or TNRB.
Gifts to charity (known as “Charitable Legacies”) are also exempt from IHT. In addition, if you leave 10% or more of your net estate (the total value less your nil rate band) to charity then rate of IHT on the rest is reduced from 40% to 36%.
Gifting Property – the Residence Nil Rate Band
There is a home allowance in addition to the NRB and the TNRB which is called the “Residence Nil Rate Band” (RNRB). To qualify for this you need to pass your home or share of it to your children, stepchildren, adopted children, foster children or grandchildren. It cannot not be shared to nieces, nephews, siblings or other relatives. The relief is only available on one property and you must have lived in it – investment properties do not count. If your total estate exceeds £2m the relief is tapered.
The Residence Nil Rate Band is added to your Nil Rate Band to give a greater tax free amount. Any unused RNRB can also be passed to your spouse or civil partner on death.
Here is a guide to how it works:
|Tax Year||Nil Rate Band||Residence Nil Rate Band||Total for Individuals||Total for Couples|
Reduce Inheritance Tax during your lifetime
A simple way to reduce Inheritance Tax is by giving gifts during your lifetime which then don’t count towards your estate on death. Some gifts are free of IHT, but others may still be chargeable depending on the amount or time between the date of the gift and the date of your death.
An obvious point is that giving away your assets means they are no longer available to you. While it is nice to reduce tax, you need to make sure you still have adequate funds available to you for the remainder of your life.
Cash gifts free from Inheritance Tax:
The following gifts of cash are completely free of IHT:
- Gifts of any amount between married couples and those in civil partnerships
- £3,000 in a tax year (your annual exemption) while you are alive
- £250 to an individual in a tax year if they haven’t benefited from your annual exemption
- Any amount as a gift for maintenance of old or poor health relatives
- Gifts to your children of 18 + for their education or training
- Wedding gifts of £5,000 to a child from each parent, £2,500 to a grandchild/great grandchild from each grandparent and £1,000 or anyone else
- Gifts of any amount to Charities and Political Parties
Potentially Exempt Transfers:
Any other gifts that do not fall into the list above are known as “Potentially Exempt Transfers” (PETs). If you survive for seven years after making them, there is no Inheritance Tax due. If you die within seven years and the gift would have been subject to IHT they are still counted in your estate but any tax due is based on a tapered rate depending on how many years have gone by since the gift was given.
Here is a guide to the tax rate paid:
|Years Between Gift and Death||Percentage of Tax to be Paid|
|7 or more years||0%|
|6 to 7 years||8%|
|5 to 6 years||16%|
|4 to 5 years||24%|
|3 to 4 years||32%|
|Less than 3 years||40%|
Inheritance Tax Planning with Backhouse Solicitors
You will see from our brief guide above that Inheritance Tax is a complicated area. At Backhouse Solicitors our expert legal team can help you plan so that your estate doesn’t pay any more IHT than absolutely necessary. With a tax efficient Will and use of Trusts where appropriate you will have greater control of what will happen to your assets upon death and your beneficiaries will receive the maximum possible amount from your estate.
Contact us to today to book a free 30-minute consultation with one of expert private client solicitors and to find out how we can help you.
Tel: 01245 893400
Visit: 17 Duke Street, Chelmsford CM1 1JU (just 2 minutes walk from Chelmsford train station)
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