Rising property prices, combined with a stagnant inheritance tax nil rate band, means that this trend is escalating, and more estates are now becoming liable to this tax.
“The most effective ways to reduce your IHT liability is through taking advantage of the relatively small IHT exemptions, continually, over a number of years. When combined these can have a substantial effect, but the key is planning early”, says Neil Relph, Managing Partner at Rouse Partners.
In this article, Neil discusses lifetime planning – the steps you can take right now, to reduce the tax burden for your loved ones.
It is worth noting that your individual circumstances should be considered and the ideas discussed in this article may not be suitable in every case. Please contact our experienced tax team if you have any queries or to discuss creating your own bespoke IHT planning strategy.
When it comes to gifting:
- Small gift exemption – You can gift up to £250 to one person each tax year. There is no limit to how many persons this applies, so if you have 15 grandchildren and gift them £250 each, this will all be tax-free.
- Annual limit – The annual limited is currently £3,000 and you can use your previous tax years allowance if you haven’t already utilised it (though only the preceding year and no further back can be used). If you are giving as a wedding gift, then you can gift an additional £5,000 to your children, £2,500 to your grandchildren or £1,000 to any other person tax-free.
- Gifts out of income – If you have an income, be that from a second property, employment, shares or investments, you are able to gift post-tax, surplus income. That being, income on which tax has been paid (including tax-free ISA’s), minus the usual expenditure needed to maintain your normal standard of living such as bills, travel and holidays etc. Also these gifts should have some regulatory, such as being paid via an ongoing direct-debit. It will be down to the executor to make the claim for these being tax free, therefore good record-keeping is crucial to ensure they have this information. We can provide a template to assist you with this and as this is more complex area can provide further advice for clients.
- Gift to a charity – Gifting cash or assets to a registered charity during your lifetime or on death are not subject to inheritance tax. However, there are certain benefits to gifting to a charity in your lifetime. For higher and additional rate tax payers this will extend your basic rate band saving you income tax. Furthermore, gifting an asset will be exempt from Capital Gains Tax, whilst still attracting income tax relief. Giving to charity also has one other advantage. If you gift more than 10% of your estate to charity, the tax rate on the remaining estate will fall from 40% to 36%. Therefore, consideration should be given as to whether this will be overall advantageous to your benefactors.
- Non-exempt gifts – Any gifts that do not fall into the categories or limits above will have tax payable on the gift value minus the annual exemption, if the donor does not survive seven years from the date of the gift. Between three and seven years there will be a part relief available which we can discuss with you when setting your IHT plan. In both cases the tax will payable on inheritance by the donee, unless specified in your will.
Trust in Trusts
Our 6th and final inheritance tax tip is on setting up a Trust. Trusts are often established to protect estates and to minimise the risks and costs associated with future divorce settlements, creditors, long-term care and taxation charges. Therefore, they can give you more control over your assets and allow your chosen family or friends to benefit from the inheritance that you want them to receive.
Putting assets into Trusts can in some cases reduce or even eliminate the Inheritance Tax liability for that asset and it can also help to keep the value of the Estate within the nil-rate band. You can find out more about our Trust services here.
Neil Relph, adds, “When choosing to set up a trust there is much to consider with regards to the most appropriate type of trust and structure. We would advise speaking to a member of our experienced tax team to discuss how we can assist.”
Contact our IHT tax advisors
IHT planning can be highly emotive and may contain a mix of the various elements noted in this article, to help you achieve your desired outcome. We would advise contacting our experienced team if you have any queries or to discuss how we can create a bespoke IHT planning strategy for you.
*Figure quoted from ONS, for tax year 2015/16.