Inheritance Tax can be complex and the rules do change regularly, so the best way to ensure that you mitigate the amount of tax payable on your estate, is to seek advice as part of your estate planning process.
Currently Inheritance Tax is payable on death at the rate of 40% on the value of your net assets over £325,000.The first £325,000 is called the Nil Rate Band because although it is taxable to Inheritance Tax, it is taxed at 0%.
If someone is in a marriage or civil partnership, they can leave everything free of IHT to their partner, and when the second partner dies, the two allowances can be added together and the combined value up to £625,000 will not be taxable. This is known as the Transferable Nil Rate Band. If you are married, the best way to pay less Inheritance Tax (or even none at all) is by making IHT efficient Wills and we can help you do this.
There is also an extra £175,000 allowance when the main home passes to a direct descendant, known as the Residence Nil Rate Bands. Whilst going through the estate planning process we will talk you through all of the Bands and also discuss any relevant IHT exemptions with you, including, Spousal Exemption, Charity Exemption, Business Property Relief and Agricultural Relief.
Can’t I just give some assets away, so I leave less than the Nil Rate Band when I die?
If you give away large amounts of money, or valuable assets whilst you are alive, you must survive this gift for 7 years otherwise the Inland Revenue will tax you as if you still owned them when you die. This is the case whether you make the gift to an individual or put it into some types of trust.
If you put your money or assets into certain types of trust or give them to a company, however, there is an immediate charge to inheritance tax – even though you are still alive.
If I do decide to give a large amount to my children now, is there anything I can do to reduce the tax?
You can insure the inheritance tax liability which would arise if you were to die within 7 years of the gift. Please ask for more information and one of our specialist advisers will be delighted to explain how this works and, if you wish, put you in touch with a trusted financial expert to help you choose the right policy for you.
So, I can’t give anything away whilst I am alive unless I survive for 7 years?
There are certain gifts you can make which are not subject to this 7 year rule. Everyone has an “annual exemption” for inheritance tax of £3,000 each every tax year. That means you can give away £3,000 in total every tax year and it immediately falls out of your estate for inheritance tax purposes. If you die within 7 years, that gift will not be brought back into account. If you haven’t used your annual exemption one year, you can roll it forward for 1 tax year, so you can give away £6,000 the next year. You can only do this once, however.
All gifts to UK charity, registered housing associations, qualifying political parties, national museums and universities are also exempt form inheritance tax altogether, whether you give to them under your Will or during your lifetime.
If your children or grandchildren get married, you can give them or their new spouse a lump sum of £5,000 or £2,500 respectively, completely free of inheritance tax.
You can give any amount to your own spouse free of inheritance tax (provided you are both domiciled in England and Wales) although you should seek legal advice before doing so, as this could affect other tax planning possibilities.
There are other gifts which are exempt from inheritance tax – please telephone or call into one of our offices to arrange an appointment and we will be happy to discuss these further.