Inheritance Tax – make sure your money goes to your loved ones... not the tax man

These days, you don’t have to be hugely wealthy to be affected by IHT.

The Treasury received over £4 billion from Inheritance Tax (IHT) receipts in 2015-16, up 22 per cent on the previous tax year. More families are calculating the value of their estates and finding they have a greater liability than they’d thought. IHT can cost your estate thousands of pounds when you die, however the good news is that expert planning can legitimately reduce the tax payable, allowing you to pass on more of your assets to your family as you’d intended.

How does IHT work?

IHT is a tax payable on money, savings or any other assets you pass on when you die, and potentially on some gifts you make during your lifetime. The current threshold is £325,000 for an individual and £650,000 for a married couple or civil partners. The unused nil-rate band can be passed to the surviving spouse or civil partner on death.

The amount of IHT payable is calculated after debts and funeral expenses have been paid, and is charged at 40 per cent. If the size of your estate means that it will be liable to IHT, you can reduce the rate at which it is payable by leaving at least 10 per cent of your estate to charity. This would mean that the rate of tax payable on the balance of the estate could be reduced from 40 per cent to 36 per cent.

The new residence nil-rate band

From April, this new rate band will apply if you leave your main residence to a direct descendant like a child or grandchild, including adopted, step or fostered children. It’s important to note that as only direct descendants can benefit, not everyone will be able to rely on it for IHT planning purposes.

The nil-rate band will increase from £100,000 in the 2017-18 tax year, to £125,000 in 2018-19, £150,000 in 2019-20 before reaching £175,000 in 2020-21. When added to the existing threshold of £325,000 this could potentially give rise to an overall allowance of £500,000 for those who are single or divorced, or £1m for those who are married or in civil partnerships.

However, it’s important to be aware that larger estates will find that the relief gets tapered; it reduces for estates worth over £2m, and means that an estate worth £2.2m has no residence relief at all.

Making gifts that are automatically free from IHT

Each financial year you can make gifts of up £3,000 (in total, not per recipient) and if you don’t use this in one tax year, you can carry it over to the next year, which means you could give away £6,000.

Gifts of £250 to any number of people are exempt. Each parent of a bride or groom can give up to £5,000; grandparents or other relatives can give up to £2,500 and any well-wisher can give £1,000. Gifts to registered charities and political parties are also exempt.

There is another way of passing money to the next generation which allows for gifts to be made from your surplus income. Conditions apply, and advice would be needed to ensure that the gifts are made in the right way.

The seven-year rule

To reduce the amount of IHT payable, many families consider passing on their wealth during their lifetime under what are called ‘potentially exempt transfers’. The catch is that for these gifts not to be counted as part of your estate on your death, you need to outlive the gift by 7 years. If you die within 7 years and the gifts are worth more than the nil-rate band, taper relief applies. This means that if you were to die, say within 6 years, the tax would be less than if you were to die a year after making the gift.

Good advice is essential

IHT planning is a complex area and requires careful thought and planning. If you feel that your estate is likely to be subject to IHT, you should obtain in-depth professional advice that looks at all aspects of your finances and develops a strategy that meets your needs. If you could use some practical, no-nonsense advice then please do get in touch.

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