Estate planning and Inheritance Tax
Inheritance Tax (IHT) is paid if a person’s estate (their property, money and possessions) is worth more than a certain amount when they die. This includes the total of everything owned and a share of anything owned jointly.
Your estate is basically the things that belong to you or that you own a share in, such as:
- Property, investments, insurance and assets like cars, jewellery or furniture.
- Gifts you have made in the past seven years, or that you still benefit from are included too - for example, a house you have gifted but still live in without paying an open market rent in return.
- Assets held in a Trust from which you receive personal benefit.
How much IHT would be payable?
Usually, there would be no IHT to pay if the value of the estate is below £325,000. Everything above this is taxed at 40%. The threshold is per person and any unused percentage of this can be passed between married couples and registered civil partners.
The Government introduced a ‘residence nil-rate band’ from the 2017/18 tax year starting at £100,000. This increases as follows:
- £125,000 in 2018/19 tax year
- £150,000 in 2019/20 tax year
- £175,000 in 2020/21 tax year
The rules around the residence nil rate band are complex and it only applies when the property, or assets representing the property are left to direct descendants. Entitlement to this exemption is also gradually withdrawn, or tapered away, for an estate valued at more than £2 million. This will be reduced by £1 for every £2 that the value of the estate is more than the £2 million taper threshold.
For more details on IHT, please visit the gov.uk website.
If your IHT nil rate band is not used up upon death, the unused portion can be transferred to a surviving spouse or civil partner.
Assets passed between spouses or civil partners are exempt from IHT (assuming the spouse or partner is domiciled or treated as being domiciled in the UK), regardless of worth and how soon you die after making them. Assets left to charity are also exempt from IHT.
Additionally, any amount of money you give away outright will not be counted for IHT if you survive for seven years after making the gift. If you die within this period, the amount of the gift will be included within your estate but there may be a gradual reduction in the IHT liability on these gifts within the 7 years. This is known as taper relief.
Bear in mind tax laws can change and sometimes even retrospectively. Also, the rules for individuals who are not UK resident or not UK domiciled are different and therefore tax and local laws should be considered by a potential investor.
How can I plan for IHT?
There are a number of things you could consider doing to help reduce your IHT bill.
- Make a Will.
- Look into exemptions that could reduce the value of your estate. There are a number of exemptions (the annual exemption, small gifts exemption and normal expenditure out of income exemption) you can use to reduce the value of your estate. For example, moving assets between spouses or civil partners does not create a tax liability. If you leave 10% or more of your estate to charity, the rate at which IHT is charged will also be reduced to 36%.
- Consider gifts - if you can afford to give away some of the assets you own, it may be possible to reduce the size of your estate.
- Think about life assurance – this won’t actually lessen your IHT but the proceeds could be used to help pay the bill on death.
- Trusts - if structured carefully, Trusts could help to reduce or possibly even eliminate your IHT liability.
Where to get further information
Because tax rules can change, the impact of taxation (and any tax relief) depends on your individual circumstances.