Inheritance Tax Planning
Inheritance tax (IHT) is levied against a person’s estate upon death. If you are single, then the current threshold before you pay inheritance tax (known as the nil-rate band) is £325,000 and for married couples (or civil partnerships) this is £650,000.
In many cases, on the first death of a spouse, no tax will be due, and the nil-rate band will be transferred to the surviving spouse and can be used on their death. Anything over these amounts will be taxed at 40%.
Because of rising house prices, the government introduced an additional nil-rate band when a residence is passed on death to a direct descendant (children or grandchildren).
How does the residence nil-rate band work?
The residence nil-rate band will only apply if you own or have previously owned a residence, and this is passed down to your children or grandchildren (including step, adopted or foster children). In simple terms, the new nil-rate band gives an extra £175,000 tax free allowance for a single (or divorced) person. This can give an individual total tax free allowances of £500,000. For married couples, the residence nil-rate band provides extra tax free allowances totalling £350,000, therefore giving a total allowances of £1million.
Please note that if you have an estate of over £2million pounds, your residence nil-rate band will be reduced, therefore increasing your inheritance tax liability; if your estate is worth more than £2.7 million, then all your residence nil-rate band allowance will be lost. Consequently, inheritance tax is becoming an issue for more and more families, largely due to house prices increasing at a higher rate, over the last fifty years. Many people are now finding their assets are creeping over the inheritance tax threshold, thus causing a greater liability of inheritance tax than first thought.
After a loved one has died, the executors will have to administer the estate and calculate if the estate is liable for inheritance tax. Your executor will be liable to pay the inheritance tax at 40%. Only when this has been paid, can the grant of probate be issued, which then allows the executor to bring together all of the assets and distribute them as per the wishes of the will, or if there is no will, then assets will be distributed as per the laws of intestacy.
Many parents/grandparents give some of their assets to loved ones whilst still alive. These are called ‘potentially exempt transfers’. For these assets to be excluded from your estate and be tax free, you must live for seven years after passing them to your loved ones. You can make gifts of up to £3,000 per annum, which would immediately come out of your estate and not be liable for inheritance tax. If you would like to know how to reduce, or avoid, inheritance tax on property, especially if you own a portfolio of rental properties, then please contact us.
So, what can I do to minimise my inheritance tax liability?
- Use your gift allowance of £3,000 each year.
- Put assets into trust.
- Life assurance to cover any IHT liability.
- Make a gift to charity in your will.
- Certain Investments can be used to take assets outside of your estate.
- If you receive income surplus to your requirements, you can make regular gifts from your income, which will be free of IHT.