Inheritance tax planning ideas
Successful inheritance tax (IHT) planning may help preserve assets for future generations of your family and if you want to minimise an IHT liability on your death it is important to start planning at an early stage. In this fact sheet we explain some basic IHT planning principles and ideas which you may find useful.
The individual nil rate band IHT allowance is presently £325,000 per person.
The IHT allowance is affected by any gifts a person makes in the seven years leading up to the date of their death which enhance the value of their estate for IHT purposes. Everything over the IHT allowance that is not otherwise exempt or able to benefit from relief is liable to be taxed at 40%.
Anything that passes either outright to a surviving spouse or is left into a trust which gives a surviving spouse an interest in possession (otherwise known as a life interest), will be spouse exempt from IHT.
It is also worth bearing in mind that a spouse’s unused IHT allowance can be transferred to their surviving spouse’s estate on application by the survivor’s executors.
Following the 2015 budget the individual IHT allowance is set to be supplemented by an additional IHT allowance (up to £175,000 in 2020/21) if various conditions are met.
The following are general ways in which a person may be able to mitigate an IHT liability:
IHT efficient investments
- For example, a life insurance policy could be taken out to cover the amount of IHT payable and if written in trust, would be outside of the person’s estate for IHT purposes.
- Certain investments eligible for Business Property Relief or Agricultural Property Relief from IHT could be purchased.
- If you are interested in these types of options then we recommend that you speak to a financial adviser and we can recommend one if needed.
Gifts to charity
- Charities are exempt from IHT altogether so anything given to them will reduce the total amount of IHT payable.
- It is also worth bearing in mind that if 10% of an estate is left to charity in a will, the headline rate of IHT reduces from 40% to 36%. This can result in other non-exempt beneficiaries receiving a larger sum than if a charity had not been included at all.
- Individuals have an annual IHT exemption of £3,000, meaning that a person can give away £3,000 in any tax year without any IHT tax consequence. The allowance can be rolled forward by one year.
- It is also worth bearing in mind that gifts made by a parent to a child in consideration of marriage are exempt up to £5,000, from grandparent up to £2,500 and from anyone else up to £1,000.
Small gift exemption
- A person can make small gifts of up to £250 to as many people as they like without any IHT consequences.
- The small gift exemption cannot be used in conjunction with the annual IHT exemption of £3,000 to gifts to the same beneficiary.
Gifts out of surplus income
- At the end of each tax year if a person has not spent their income it effectively becomes capital and on their death will be taxed again at 40%. For example if a person’s income is £100,000 and their expenditure £50,000, then provided they could afford to do so, they could give up to £50,000 away in that tax year without any IHT consequence.
- In order to qualify for this exemption there must be a pattern of giving over a period of time and as such this type of gift is not appropriate as a “one off”.
- A reasonable period of time would be three to four years.
- If these types of gifts are contemplated then it is absolutely essential that HM Revenue and Customs form IHT 403 is completed on an annual basis so that when a person dies seven years’ worth of records are available.
Gifts and the seven year rule
- Gifts are an effective way of reducing the size of a person’s estate provided that they survive the date of the gift by seven years. If gifts are made and the donor does not survive the full seven year period then the value of the gift first reduces the person’s IHT allowance and if over the IHT allowance the surplus will be subject to IHT at 40%.
- Gifts into trusts are potentially chargeable to IHT immediately to the extent that they exceed a person’s IHT allowance and if over the allowance may also be subject to IHT again on a person’s death if they die within seven years of setting up the trust.
- If gifts are contemplated, then it is important that advice is taken about the effect of the gift given and complete records of any gifts made are kept. The effect of such gifts on finances should also be kept as this may eventually need to be submitted to HM Revenue and Customs.
This factsheet is not intended to be an exhaustive list of all IHT planning options available to you but highlights a few generic planning ideas.
For more tailored IHT planning advice please do contact one of the members of our specialist Private Client team who will seek to assist in identifying further IHT planning options as well as help to implement any particular option you want to pursue.
For further information, please contact one of Brachers Private Client team.