Posted by Tax Innovations on 14 Mar 2017

Inheritance Tax: Planning for the Future

The nature of Inheritance Tax means that it is rarely an urgent concern for individuals, but without a strategy in place it is easy to find yourself with no options for Inheritance Tax mitigation just when you need it the most, and an unnecessary 40% Inheritance Tax liability.

Each year, as the value of property increases without any increase in the Inheritance Tax nil-rate band, more and more people have estates that are subject to Inheritance Tax. Whilst HMRC allow unused nil rate band to be passed between spouses, and are introducing an additional nil-rate band from April 2017 for taxpayers passing the family home to close relatives where their estates are worth under £2.2m, the increasing impact of Inheritance Tax seems likely to continue.

What is Inheritance Tax?

Inheritance Tax is deceptively simple in principle: when you die, your estate, as well as any transfers of wealth made in the 7 years prior to death will be chargeable to Inheritance Tax at 40%. These amounts are reduced by the nil-rate band, so only the excess is taxable. Where a transfer was made more than 3 years prior to death, the Inheritance Tax rate is reduced by 8% per year so 7 years after the transfer the rate reaches 0%.

Transfers of wealth generally do not attract an Inheritance Tax charge during your lifetime (although lifetime transfers into a trust may be charged at up to 20%) but may leave the recipient with a tax charge after you die.

Changes to Inheritance Tax in 2017

From April 2017, the nil rate band includes the additional £100,000 main residence nil rate band for taxpayers passing the family home to close relatives (which will increase by £25,000 per year to £175,000 from April 2020 onwards). This additional nil rate band can be transferred between spouses (as is the case for the existing nil rate band) but is tapered back down by £1 for every £2 their estate is worth over £2m.

For example, a married couple with a joint estate of £250,000 and house worth £600,000 will each have £325,000 of standard nil rate band and £100,000 of main residence nil rate band from 6 April 2017 This gives them a total exemption of £850,000, therefore their entire estate will be free from Inheritance Tax.

Tax Exemptions

You receive an annual exemption of £3,000 for Inheritance Tax purposes, and unused exemption can be used in the following tax year. There are also many specific exemptions including:

  • Gifts of up to £250 per recipient in a tax year.
  • Gifts to charities and political parties.
  • Gifts on marriage of up to £1,000 per person (increased to £2,500 for a grandchild or great grandchild, and £5,000 for a child). Normal gifts out of income, but the person making the gift must still be able to maintain their standard of living after making the gift.
  • Payments to help with another person’s living costs (e.g. an elderly relative or a child under 18).
  • Normal gifts out of income, but the person making the gift must still be able to maintain their standard of living after making the gift.
  • Payments to help with another person’s living costs (e.g. an elderly relative or a child under 18).

Gifts to spouses are completely free of Inheritance Tax, where both spouses are UK domiciled or both are non-UK domiciled; otherwise the exemption is limited to £325,000.

Inheritance Tax Planning

Inheritance Tax planning ranges from the straightforward use of the gift exemptions and making lifetime transfers that will be free of Inheritance Tax after 7 years (plus taking out life insurance to cover the potential Inheritance Tax charge in that 7 year period after the transfer), through to choosing investments based on their IHT exposure and the use of offshore trusts or other vehicles. Whatever plan is developed to reduce Inheritance Tax, it is important to ensure that the need to fund your lifestyle is factored into decisions to reduce the value of your estate.

Tax Innovations

Tax Innovations has experience of assisting with a broad range of Inheritance Tax planning and could help you to pass on as much of your wealth to your beneficiaries as possible. Whether you need a quick review of your Inheritance Tax position or complete planning and implementation of Inheritance Tax structures, Tax Innovations is ready to assist you.

Contact us

If you would like any advice regarding the above article or would simply like to discuss other ways in which we could help you or your business, please contact us on 01962 856 990 or customerservice@taxinnovations.com.