Inheritance Tax Planning
Benjamin Franklin once said: " The only things certain in life are death and taxes". Unfortunately Inheritance Tax (IHT) concernes both.
When you die, the Government assesses how much your estate is worth and then deducts your debts to determine its net value, which may be taxed.
Mitigating Inheritance Tax is one of the biggest money saving there is, as careful planning can save your estate and beneficiaries hundred of thousand of Pounds in Tax.
It is therefore of paramount importance to plan in advance and seek the right advice.
Generally speaking, you will have to pay 40% tax on anything above £325,000 if you are single, or £650,000 for a married couple/civil partnership.
This is the inheritance tax threshold, also called the Nil Rate Band (NRB).
However, If parents or grandparents pass their main residence to their direct descendants, their estates will benefit from an additional allowance, the Residential Nil-Rate Band (RNRB), of £175,000 by April 2020 (meaning a total individual allowance of £500,000 by April 2020).
Unfortunately, the RNRB can be reduced or lost if the value of the estate reaches a certain limit.
Because these rules can be quite complex, we recommend to our clients to first discuss their situation with us, so that they understand their impact on their estates and what can be done to mitigate their effects.
What is available
In addition to the RNRB, there are certain tax reliefs and exemptions available from HMRC that, when used properly, can help to keep wealth and assets in the family.
Under the IHT spouse exemption, married couples /civil partners are able to pass on the entirety of their estate to their spouse, free from inheritance tax
Married couples/civil partners can also pass on their unused NRB to their spouse ("transferrable nil rate band") which provides extra relief on the estate of the surviving spouse.
Spouses can also use lifetime transfers and gifts to others. When the transfer is between spouses/civil partners (exempt transfer), or when a gift is made to a Charity, no IHT is due. Thus, transferring assets in lifetime can offer tax-efficient planning, maximising the use of the NRB on death.
Lifetime transfers to individuals other than a spouse/civil partner however, will be treated as PETs (Potentially Exempt Transfers). They are IHT exempt if the donor survives the transfer by at least seven years. If not, IHT will be due at a tapered rate.
Lifetime transfers into most Trusts are treated as Chargeable Lifetime Transfers (CLT). 20% IHT may be due at the time of transfer if the value of the tranfer exceeds the available NRB. If the donor die within seven years of making the gift, additional tax may be due. No further IHT arises if the donor survives seven years.
Effective Inheritance Tax planning, will help mitigate IHT liability and maximise financial benefit to your loved ones. Without careful planning and a valid Will however, your estate becomes exposed to the risks of tax and/or intestacy rules.
Your IHT planning should always be based on your individual circumstances, estate, assets and wishes. Other potential tax liabilities like Capital Gains Tax ought to be included in the discussion as well.
Consideration should always be given to your surviving spouse’s/civil partner's needs, and also what happens to their own estate when they die.
In addition, mitigating liability to IHT very often requires exploring tax-efficient structures such as Trusts, involving your spouse and your family.
Reviewing your situation and arrangements regularly will ensure your wealth and assets pass on to your beneficiaries according to your wishes.
If you are concerned about IHT and estate planning, we can help.
Please fill out the form and a member of our team will contact you or call 0800 612 5331.