Minimising Inheritance Tax
If the value of your estate exceeds a certain threshold, Inheritance Tax becomes due on the excess amount. With Inheritance Tax currently payable at 40%, this may cause financial hardship to those you leave behind, especially when a house or other property must be sold to pay the tax bill.
Why allow your life’s savings to be eroded in this way? With proper lifetime and testamentary tax planning, plus the use of appropriate trusts in your Will, we can ensure that your loved ones receive the maximum possible benefit from your estate.
In its emergency Budget, the coalition government froze the level above which Inheritance Tax (IHT) is payable at £325,000 until the 2014/15 tax year. Above this level, IHT is payable upon all your assets, including any held in trust, as well as any gifts you made within seven years of your death. The first, tax-free £325,000 is known as the “nil rate band” (NRB).
Spouses and civil partners
Since October 2007, married couples and registered civil partners can effectively increase the NRB on their estate when the second partner dies – to as much as £650,000 in 2012/13.
Married couples and registered civil partners are also allowed to pass assets from one spouse or civil partner to the other during their lifetime or when they die without having to pay Inheritance Tax – no matter how much they pass on – as long as the person receiving the assets has their permanent home in the UK. This is known as the spouse or civil partner exemption.
If you leave everything you own to your surviving spouse or civil partner in this way:
- your whole estate would be exempt from Inheritance Tax, and
- your NRB remains unused
That unused NRB is therefore available to increase the nil rate band of your spouse or civil partner when they die – even if your spouse had re-married.
Your spouse or civil partner’s estate can therefore be worth up to £650,000 in 2012/13 before any Inheritance Tax is payable.
In practice, the executors or personal representatives must apply to HMRC within 24 months of your spouse or civil partner’s death to transfer your spouse or civil partner’s unused NRB.
Inheritance Tax Exemptions and Reliefs
There are several exemptions and reliefs available to mitigate the impact of Inheritance Tax. Some of the possibilities we will discuss with you include:
- Spouse or civil partner exemption. Inheritance Tax is not payable on anything left to a spouse or civil partner who has their permanent home in the UK, nor on lifetime gifts made to them
- UK charity exemption. Gifts to UK registered charities, whether lifetime or by will, are exempt from Inheritance Tax
- Potentially exempt transfers. If you survive for seven years after making a gift to someone, the gift is generally exempt from Inheritance Tax, no matter the value. A reduced rate of Inheritance Tax is payable if the donor survives between three and seven years after making the gift, as “taper relief” is available
- Annual exemption. You can give away up to £3,000 each year, either as a single gift or as several gifts adding up to that amount. You can also use any remaining allowance from the previous year
- Small gift exemption. You can make small gifts of up to £250 to an unlimited number of individuals, tax-free
- Wedding and civil partnership gifts. Gifts to someone getting married or registering a civil partnership are exempt:
- up to £5,000 to each child
- up to £2,500 to each grandchild
- up to £1,000 to anyone else
- Business, Woodland, Heritage and Farm Relief. If you owned a business, farm, woodland or National Heritage property, some relief from Inheritance Tax is available depending on the circumstances
- Gifts funded by normal expenditure out of income. Such gifts can be exempt from IHT (relief must be claimed; it is not given automatically) although for them to be accepted by HMRC it will be necessary to show that the gift is part of the donor’s normal expenditure and is funded out of income not capital. The relief will not be given if you had been materially reducing yourstandard of living or running down savings to fund the giving
Strategies to reduce your IHT exposure
As part of our Will-writing service we will seek to minimise your IHT liability wherever possible – although never at the expense of your wider estate planning goals. Some of the strategies we may suggest include:
1. Planning ahead
Work out the value of your estate and the size of any potential IHT bill. Then think about where you want your money and property to go to – and why. If you are facing an IHT exposure then it’s never too early to start considering strategies to bring that exposure down. Could you afford to give away any of your assets during your lifetime? How much income will you need to live on comfortably?
Anything you pass on to a spouse, or registered civil partner, is free of Inheritance Tax. However, legacies between unmarried couples are not tax free, which can present a serious problem when a couple jointly own their home. This can lead to people having to pay an IHT bill just to continue living in their home.
3. Minimising your estate
You cannot be taxed on money that was never yours, so it is worth ensuring that as much as possible is outside your estate. If you are married or in a registered civil partnership, consider transferring assets to your spouse or civil partner to ensure that the full amount of each of your nil rate bands can be utilised. Write any new life insurance plans under trust, and arrange to transfer any existing life policies into trust. If your employer pays a death in service benefit, complete a nomination form to make sure any money goes directly to the person/s you specify and not into your estate.
It is also worth thinking about any legacies you receive. Someone who benefits from a legacy can divert that gift to another person, by applying for a ‘deed of variation’ within two years of the death of the giver. This may help to avoid any double taxation of that legacy.
4. Considering your home
For most of us, our family home is our biggest asset – and most at risk to satisfy an Inheritance Tax bill. The Government has clamped down on schemes to avoid the ‘gifts with reservation’ rules, which had allowed people to give away homes, but still live in them. Now, income tax can be charged for living rent-free in a home you once owned.
However, with proper advice there are still ways to reduce IHT. Most couples who own a home together do so as joint tenants. This means that, if one person dies, the other automatically becomes the outright owner of the property.
The alternative is to sever the joint tenancy and register as ‘tenants in common’, each owning half the property absolutely. This means that on death, your share may be left to someone else to keep down the size of your partner’s estate.
5. Diversifying your investments
Some investments are given favourable treatment for IHT purposes, including shares in unquoted businesses and those listed on the AIM, farms and farmland, and woodlands. Any favourable tax treatment may have to be weighed up against the risks attached to such investments and their liquidity.
6. Considering trusts
Apart from will trusts, there are several kinds of lifetime trust which may be effective in carrying out your plans and avoiding Inheritance Tax. These trusts can be expensive to establish and run, however, and should not be used without first seeking specialist advice.
7. Utilising annual IHT allowances
The list above shows the various reliefs and allowances applicable to lifetime giving. Depending on the timing of the gift in relation to the time of death, up to 100% IHT can be avoided.
8. Insuring against IHT
If you are able to estimate the size of your IHT bill, you might want to consider taking out insurance to cover all or part of it. Setting up a specific whole-of-life insurance policy written into trust can provide your executors with a lump sum on your death which lies outside your estate. The premiums paid for the policy are treated as a gift from income and will also be free from IHT. The advantage of insuring against IHT as opposed to reducing the size of your taxable estate is that you retain ownership of your wealth – and the ability to use it should the need arise.
9. Making charitable donations
As discussed on our charitable donations page, all testamentary gifts to registered UK charities are free of Inheritance Tax.
10. Going SKI-ing!
Also known as Spending the Kids’ Inheritance – in other words: it’s your wealth and if the idea of leaving a large amount to HMRC makes you uneasy, there’s no more enjoyable way to reduce that tax bill than to spend your money yourself…
Contact us today on 07887 946 557 or online to discuss how Alex Truesdale Wills Limited can help you with a Will or associated service.