Inheritance Tax (IHT)
Reducing your Inheritance tax (IHT)
Inheritance tax (IHT) is a 40% tax that is charged upon someone’s estate (property, money, possessions) when they die. There are a number ways of reducing IHT. There’s basic things that you could do such as utilising the tax free allowances and giving away a certain amount of tax free money during your lifetime so that it’s not included in your estate. And then there’s more complex IHT planning such as setting up a trust. The level of Inheritance tax planning required will very much depend on your own specific circumstances, lifestyle and the size and make up of your estate.
Nil Rate Band allowance
Everybody is entitled to a nil rate band allowance and can leave £325,000 worth of assets free of any IHT tax, £650,000 if you are married.
Annual Exemption and Exempt Gifts
Another allowance that’s available to everybody is the annual exemption. Here, you can give away cash/assets worth up to £3,000 a year without it becoming a part of your estate. While £3,000 doesn’t seem like a lot, if you did this over a 30 year period, that would be £90,000. You would be potentially saving yourself £36,000 of IHT (40% of £90,000). If you’re married and both of you did this, then you’ve potentially avoiding £72,000 of IHT (40% £180,000). There are also certain exempt gifts that you can make in order reduce IHT such as wedding gifts, gifts to help someone with living costs and gifts from your surplus income.
Other gifts may also be exempt from IHT, but this will depend on when they are made. Generally, if you make a gift to a person (not a business or a trust) seven years before your death you will not need to pay IHT to it. These are known as Potentially Exempt Transfers (PETs). Note, if the asset is a chargeable asset (i.e. property) for Capital Gains purposes then you may need to pay Capital Gains tax when transferring this gift over, so this is something to keep in mind.
If you were to die within seven years of making a gift then IHT could become due on the gift itself if it’s valued over £325,000. If it’s under £325,000 then you could still ultimately end up paying IHT, as the £325,000 allowance that you can reduce the estate by, will shrink by the value of this gift, subsequently increasing the IHT now due on the estate itself.
IHT allowances when gifting your own home
Since 2017, a new allowance, the main residence nil rate band was born due to the steep rises in House prices. As long as you have lived in this house at some stage, you may be entitled to receive a further £175,000 tax free allowance (£350,000 if Husband and wife) when passing down your main home to a direct descendent (i.e. child or Grandchild). So if you’re a husband and wife, and have an estate value of less than 1 million, and your main home makes up your estate then you could avoid paying any IHT all together. This is because, between both of you , you will receive a combined allowance of £350,000 on top of the combined Nil rate band of £650,000, which will cover an estate value of £1million.
Note, if your estate value exceeds £2M then this relief will be reduced by £1 for every £2 that it goes over £2m. If the Estate value were to exceed £2.35m then you will lose entitlement to all of the £175,00 allowance.
Estates valued above £1m that consist of rental properties will require more pro activeness when it comes to IHT planning. Furthermore, It’s really important to not just consider IHT in isolation. The decisions you make here can have consequences on income tax and capital gains, which is commonly overlooked.
At Wiseborne the actual partner will always personally undertake all of your tax work and will be well placed to advise you on the affects that your decisions will have on these other taxes as well.
Other ways of reducing the IHT could include:
Putting your life insurance policy in trust so that the payout does not become a part of the estate.
Having a deed of variation in the will.
Equity release and insurance policies.
Setting up a trust, which can help manage your IHT bill and also keep an element of control of what happens to your assets when you pass away.
Other things outside of this list may include also freezer shares for property/investments, debt leveraging to reduce the estate value and pensions which are exempt from IHT. Further options may also be available depending on your circumstances.
Our services:
Help with drawing up and reviewing your will
Optimising lifetime transfers between spouses
Making full use of exemptions and lower tax rates on lifetime transfers
Transferring agricultural or business property
Transferring assets into trust
Specialised tax planning for property owners and property companies
Arranging adequate life assurance to cover potential inheritance tax liabilities
Having convenient and direct access to a tax expert at partner level , that will be the same exact person advising you for many years ahead and not having to worry about different people that come and go as with other firms, ranks as one of the main reasons why clients use us for their IHT planning.
How much is it?
The fee will depend on the complexity of the estate. We do not charge based on the estate size and value, but rather on the extent of planning required, which normally works out cheaper for the client. Also, just like with all of our tax work, you will be working closely with the partner and nobody else through out which is something that you will not find at most other firms. Our unique approach means that you will not need to navigate through secretaries, account managers & juniors to get the advice you need.
Please contact us for more information.
Frequently asked questions
How is my estate valued? The current Market value of everything you own will then be reduced by the liabilities owed. For example, if you have £100,000 in savings and own a property that’s valued at £800,00 with a mortgage of £280,000, the value of the estate will be £620,000.
Who pays the IHT? Usually the estate of the deceased will pay the IHT. The beneficiary may need to do so only in certain circumstances.
What if i give away my main home but still live in it? The house will still form part of the estate and attract IHT as you are still retaining the benefit of the asset. This is known as gift with reservation.
However, If you were to pay rent at the market rate, or some form of money’s worth to the commercial rental value then the home could potentially avoid IHT. Note, the individual receiving the rent would now become subject to income tax , which could invoke a high income benefit charge, remove certain state benefits that they currently get, prevent entitlement to the first time buyer reduced stamp duty rate and so much more. A great deal of planning and thought needs to be put into this decision, as the benefits of doing so will vary significantly from one person to the next and involve weighing up not just IHT, but also other taxes.
What happens if i downsized my family home? You may have downsized the family home to move into a relative’s home or into residential care. The family home does not need to be owned at the date of death to qualify for the residential nil rate band allowance.
Furthermore, as long as the property disposed of would have qualified for this allowance had you retained it and the replacement property forms part of the estate, and is being gifted to direct descendants, you will remain eligible to claim this allowance.
Lastly, the downsizing or disposal of the property must have taken place after 8 July 2015. There are no such time limits in regards to the period between when the property disposal and when the death occurs.
What if the family home is placed into a trust? The residence nil rate band may be lost if the property is placed into a discretionary will trust for the benefit of children/grand children. However, there are trusts out there where this allowance may not be lost. For example, if the trust gives the children/grand children absolute interest or interest in possession of the home then this allowance can still be claimed.
Is my business exempt from IHT? Most businesses can be passed down free of any IHT as they will be eligible to claim Business Property Relief (BPR). However, if the business holds investment assets (i.e. rental property) then BPR may be restricted or denied by HMRC.
If I’m married will I be exempt from IHT? Yes, If you leave your entire estate to your partner. Any gifts made between husband and wife are exempt from IHT. Furthermore, any of your unused allowances can also be transferred over to your partner as long as the paperwork is completed within the 24 months time limit.