Without appropriate provision, Inheritance Tax (IHT) could become payable on your taxable estate that you leave behind. Your taxable estate is made up of all the assets that you owned, the share of any assets that are jointly owned, and the share of any assets that pass automatically by survivorship. Careful planning can reduce or even eliminate the IHT payable.
IHT is not payable on the first part of the value of your estate – the ‘nil-rate band’. The nil-rate band is currently £325,000. If the total value of your estate does not exceed the nil-rate band, no IHT is payable. Outstanding debts and funeral expenses can be deducted from the value of your estate.
Leave your interest in the family home
Commencing 6 April 2017, an additional ‘residence nil-rate band’ (RNRB) allowance was introduced if you leave your interest in the family home to direct descendants (such as children, step-children and/or grandchildren). This only applies to your main home but can be available even if that home had been sold after July 2016.
The RNRB is being phased in gradually. For the 2018/19 tax year, the maximum additional allowance is £125,000, increasing your total IHT allowance to £450,000 (£900,000 for a married couple). The maximum allowance will rise by £25,000 each tax year until it reaches £175,000 in 2020. This will give you a potential total IHT allowance of £500,000 or £1 million for a married couple. For estates worth more than £2 million, the tax relief is tapered away.
Ways to reduce the amount of IHT you may have to pay:
Make lifetime gifts
Gifts made more than seven years before the donor dies, to an individual or to a bare trust, are free of IHT. So, it might be appropriate to pass on some of your wealth while you are still alive. This will reduce the value of your estate when it is assessed for IHT purposes, and there is no limit on the sums you can pass on. You can gift as much as you wish, and this is known as a ‘Potentially Exempt Transfer’ (PET).
If you live for seven years after making such a gift, then it will be exempt from IHT, but should you be unfortunate enough to die within seven years, then it will still be counted as part of your estate if it is above the annual gift allowance (£3,000). However, the longer you survive after making the gift (subject to surviving at least three years), the lower the IHT charge.
You need to be careful if you are giving away your home to your children with conditions attached to it, or if you give it away but continue to benefit from it.
Leave a proportion to charity
If you leave at least 10% of your estate to a charity or number of charities, then your IHT liability on the taxable portion of the estate is reduced to 36% rather than 40%.
Set up a trust
You may want to consider putting assets in trust – either during your lifetime or under the terms of your Will. Putting assets in trust – rather than making a direct gift to a beneficiary – can be a more flexible way of achieving your objectives.
Trusts enable the donor to control who benefits (the beneficiaries) and under what circumstances, sometimes long after the donor’s death. Compare this with making a direct gift (for example, to a child), which offers no control to the donor once given. When you set up a trust, it is a legal arrangement, and you will need to appoint ‘trustees’ who are responsible for holding and managing the assets. The terms will be set out in a legal document called ‘the trust deed’.
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. If you would like advice on this matter, please contact Chris Slatter on firstname.lastname@example.org or 01295 250401.