Inheritance Tax Planning Guide

When we die, we like to imagine that we can pass on our assets to our loved ones so that they can benefit from them. In order for them to benefit fully from our assets, it is important to consider the impact of inheritance tax (IHT).

Our complete guide to Inheritance Tax takes you through all of the key considerations including practical advice on how to limit the amount of inheritance tax to be paid on the assets you leave behind for friends and family. Click on the below links to find out more information:

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What is Inheritance Tax?

Inheritance Tax (IHT) is the tax levied after someone’s death on their money, property and possessions – known as their estate. IHT is based on the estate at the time of their passing as well as anything given away by them in the previous seven years (sometimes longer if particular circumstances apply).

When Do You Pay Inheritance Tax?

After your death, your executor (person named in your Will) must check how much your estate is worth, deducting any debts and funeral expenses. If your estate is valued above the inheritance tax threshold – currently £325,000 in 2016 / 17 – then your executor will need to pay IHT at the rate of 40% on everything over this amount.

The first £325,000 is taxed at 0%, this is sometimes called the ‘nil-rate band’. Don’t forget that your estate for inheritance tax includes more than the assets you own on death.

Important Point: Married couples and civil partners are normally allowed to pass their estate, including assets of any amount, to their spouse tax-free when they die. This means you do not have to pay Inheritance Tax on assets passing to your spouse or civil partner. If you do this then your surviving spouse or civil partner benefits from an increased IHT allowance on their death, of up to double.

Inheritance tax is normally due within the six month period after your death. However, if inheritance tax has to be paid with regards to land, business assets or property, the inheritance tax may be paid off in set instalments over a period of 10 years although interest on the undue tax will be charged.

Inheritance tax bills that are paid late will usually have interest added to them as a result of the delay in payment.

Who Pays Inheritance Tax?

Inheritance tax is normally paid by the executor (person named in your Will) or an administrator (when no Will is in place) from the funds in the estate. If there is no money in the estate, then it will be paid from money raised from the sale of assets.

What are considered ‘assets’ in your Estate?

Assets that would normally form part of your Estate are items such as:

  • Your home (and contents)
  • Your vehicle(s)
  • Shares or investments
  • Bank and building societies
  • Jewellery
  • Other valuable possessions
  • Any foreign property
  • Anything you have given away within the seven years prior to your death
  • Anything that you have given away at any time where you have retained some sort of benefit
  • Interests in some sorts of trusts

How to pay an Inheritance Tax bill?

Following your death, your executor must first value your estate, calculating how much it is worth, and then submit full details to HMRC. Your executor then has to pay the inheritance tax bill on delivery of the account to HMRC. Once your executor has paid the IHT, they can then apply for a Grant of Probate in order to access and distribute your assets.

Note: If you did not create a Will, an ‘administrator’ will follow instructions under the law of intestacy.

Changes to Inheritance Tax

The Government are making changes to Inheritance Tax law. A new Transferable Main Residence Allowance (TMRA) will come into play in April 2017. It is designed to help people pass on property to their descendants.

TMRA will initially be set at £100,000, rising to £175,000 by 2020/21. When added to the current IHT threshold of £325,000, it will allow each individual to pass on £425,000 with no tax payable – or £850,000 per couple. By 2021, the tax-free limit will be £500,000 each, or £1million for married or civil partners.

Transferable Main Residence Allowance Inheritance tax

So, how do I avoid paying inheritance tax?

 

Inheritance Tax Planning

If you think your estate might have to pay Inheritance Tax, then there are some simple inheritance tax planning measures you can take to reduce the amount payable. Like most things, Inheritance Tax benefits from early planning. The sooner you think about it, the better.

There are a number of ways of planning ahead and avoiding inheritance tax. It’s important to point out that inheritance tax is complicated and you should not take any action (or not take action) in an attempt to limit Inheritance tax without proper advice specific to your circumstances. There are severe penalties for breaking the tax rules or if incorrect or incomplete information is given to HMRC.

How to Limit Inheritance Tax

There are lots of rules and allowances that can dramatically change how much inheritance tax is paid. There are also ways to plan for the future to limit inheritance tax as much as possible. We have put together some ways that can help you plan ahead and reduce the amount of Inheritance Tax:

Wills & Inheritance Tax

By writing a Will, you determine what happens to your money after you die. It can also help ensure that matters are dealt with in a tax-efficient way. Specialist Will-writing services from solicitors such as Burt Brill & Cardens provide you with confidence and security in knowing your needs are covered.

Gifts and Inheritance Tax

You can pass on money, property or possessions as gifts without paying any tax, as long as you survive for seven years after giving it to the recipient. If you die within the seven year period but more than three years after the gift and you have gifted more than the nil-rate allowance within the seven year period then the tax you pay is reduced.

Annual Exemption

Anyone can give away up to £3000 a year, and pay no tax. This is known as the annual exemption. If unused, this allowance can be carried over to the following year, up to a maximum of £6000.

Important: if you are the recipient of a gift, and the giver has died within seven years, and has already given away more than £325,000, you could be liable to pay IHT yourself.

Gifting £250 a Year

Gifts of up to £250 a year to any one recipient get excluded from inheritance tax – so it’s a good idea to give this comparatively small amount to a large number of your relatives in regular stages. You’ll be surprised at how effective this is.

Wedding Gifts

Currently, you are able to give up to £5000 as a gift when your children are marrying; £2500 to a grandchild or great grandchild and £1000 to anyone. This is tax free, and you’re also able to give per person – so as much as £10000 from each side of the family. If you have spare wealth, this is a great way of avoiding future costs.

Inheritance tax and wedding gifts

Charity Donations & Inheritance Tax

Many people make donations to charities in their Wills – these donations are exempt from Inheritance Tax. With the introduction of Legacy10, you can give more to charity and at the same time allow your family to benefit from a reduced IHT tax rate. Under the scheme, if you give 10% of your wealth to charity, the inheritance tax rate on the rest of your estate will drop to 36% rather than 40%.

This means your donation to charity will be up to four times greater than the cost to your family, as HMRC has pledged to cover 76p for every 24p donated. Therefore, there will be no greater cost for your family if you choose to give 4% percent or 10% of your estate to charity.

So, if you have already planned to give something to charity in your Will you need to have it checked to see if giving away a little more will reduce the Inheritance tax rate on the rest of your estate. It is extremely important that this is documented clearly in your Will if you want to take advantage of the scheme. Failure to do so could make your donation invalid or reduce it by a significant amount.

Speak to Burt Brill & Cardens to discuss your requirements and let us guide you through the process. We can help minimise the amount of tax your loved ones pay and maximise what they, and your chosen charity, receive.

Family Trusts

A family trust is a good way to keep assets within the family whilst still controlling their use. They can be set up with as little as £500 in them.

Family trusts can be effective in sheltering assets from claimants in the event of a business or relationship breakdown. They can also be used to make provision for a child or dependant without giving the money outright to that person straight-away. That can save Inheritance tax. Find out more about Trust Law.

Other Ways of Reducing Inheritance Tax

Insurance 

Although you cannot use insurance to avoid inheritance tax – you can use it to pay for the IHT. There are two main types of insurance that are used for IHT planning: ‘Gift inter-vivos’ insurance and whole life insurance. For individuals who have good life expectancy this can be a very cost-effective means of providing cash to pay Inheritance tax following an unexpected death.

Specialist Investments

Although not for everyone, there are various investments designed to solve Inheritance Tax issues, including loan & bond plans, specialist tax efficient investments, discounted gift schemes and flexible revisionary interest trusts. Again they can work well but you need to be sure they are right for you. Proper advice is key.

Own Some Land

Land used for agricultural purposes that you let out can become inheritance-tax free after you’ve owned it for seven years, and only two years if you are farming it. If the land qualifies this is a very valuable relief but there are strict rules so you need proper advice.

Buy a business

Trading businesses can be wholly or partially exempt from inheritance tax after two years. There are special rules about what is a trading business so again proper detailed advice is needed.

Service to the Country

If your death is caused by an injury or wound whilst on active service against an enemy, your estate can qualify as being tax-free after death. Of course, it’s most relevant to the Second World War, but also applies to the Falklands conflict.

Seek Professional Tax Advice

When you are sorting your affairs, this element of avoiding Inheritance tax can feel like a minefield and be a daunting prospect to negotiate. Paying someone to provide tax advice and sort through your affairs for you can become a good investment when you compare it to the amount of money that can potentially be saved. It is important that you seek professional tax advice as Inheritance Tax planning is a complex process. It will be a well worth investment and can save you money in the long run.

Inheritance Tax and Property

One of the more complicated areas of IHT planning relates to property. The amount of IHT that is paid on a home depends on a number of factors including how you owned it and how you passed it on. If you leave a property that you own in its entirety in your Will, then the value of the whole home will be included in the estate for Inheritance Tax purposes. If you are a joint tenant with your partner then they will automatically inherit your share of the house upon your death. IHT is not payable if your husband or wife continues to live in it.

Here is an overview of the other scenarios:

Passing on a home as a gift – if you pass on your home as a gift to your children or a loved one, then it is treated as a gift and therefore falls under the seven year rule. If you continue to live in the home without paying rent then IHT will need to be paid even after the seven year period – this is known as a ‘gift with reservation of benefit’. 

Giving your home away and moving out – you can give away your home but make social visits and short stays there without impacting the seven year rule.

Giving away part of your home to someone who moves in – you can give away half of your home to your children or loved ones and this will be excluded from the estate valuation as long as the bills are split and you live there for more than seven years after giving it away. 

Giving away your home and living in it – you will need to live in the home with the new owner and pay the going rental rate of a similar property when you live there. 

Selling your home and giving away the money – you can sell your home and giveaway the proceeds to your children or loved ones, but again, this will be treated as a gift and the seven year rule applies. Note: It is important to consult a solicitor if you are thinking about giving away or selling your home. You should also read up on Capital gains tax on Inherited Property. 

Business Property Relief / Agricultural Property Relief 

Anyone with a business or farm should talk to his or her accountant or solicitor about Inheritance Tax planning. Some business assets are completely exempt from Inheritance tax. Broadly speaking these are assets used wholly in connection with a business or farming. There are complicated rules and this is an area where HMRC are focussing on tightening up the rules. It is very important that you get proper advice from an solicitor who is knowledgeable about this area like the team at Burt Brill & Cardens.

Exploit Money Tied Up in Property  

As a more general point, if your family have left home then you may want to consider downsizing. Do you really need to be living in such a big property? By selling the family home, you can spend some of the wealth in this particular asset before it gets swallowed up in tax.

Contact Burt Brill & Cardens – Inheritance Tax Solicitors

If you require any more information about inheritance tax, how to make a Will or what to do to start organising your affairs, contact us at Burt Brill & Cardens today to take the first steps towards a bespoke arrangement to suit you.

We are happy to provide you with expert legal advice about Inheritance tax. Contact us by email enquire@bbc-law.co.uk or telephone us on 01273 604123 and ask for Maureen Edwards.   Return to Wills, Trusts and Probate; Tax Planning, or read our guide to Later Life Planning.