IHT is charged on a person’s estate when they die and on certain gifts made during their lifetime.
The rate of tax on death is 40% and 20% on lifetime chargeable transfers. The first £325,000 is not chargeable. This exemption is known as the nil rate band.
Most gifts mode more than seven years before death will escape tax Therefore, if you plan in advance. gifts can be made tax-free. The result can be a substantial tax saving.
We give guidance below on some of the main opportunities for minimising the impact of the tax
Much estate planning involves making lifetime gifts of capital to use exemptions and reliefs or to benefit from a lower rate of lax on lifetime transfers.
Any plan must take account of your circumstances and aspirations the need to ensure your financial security (and your family’s) cannot be ignored. If you propose to make gifts, the interaction of IHT with other taxes needs to be considered carefully.
If you do nothing you may become exposed to a large IHT liability
As the main IHT liability is likely to arise on death, a sensible and up to date Will is important
Do you have a Will?
Where is it kept – do you and your family know?
Is it up-to-date?
Does your Will make full use of IHT exemptions and reliefs?
Do you have adequate life assurance?
In the two year period following a death, the terms of o Will can be varied or disclaimed by using a Deed of Variation.
Using the nil rate band
On aeath it is vital to ensure that the nil rate band, currently £325,000, is used, assuming that it has not already been utilised over the last seven years.
One historic problem is that transfers between spouses are exempt from IHT. This could cause a loss of the nil rate band to one spouse.
John dies leaving the whole of his estate ot £800,000 to his wife Jane. A few years later Jane dies, leaving her whole estate of £900,000 to her children.
Under the old rules, on John’s death there was no IHT, as transfers between husband and wife were exempt, but on Jane’s death the IHT payable was based on £575,000 (£900.000 less the current nil rate band of £325,000)
The government has moved to address this problem, by allowing the proportion of the nil rate band unused on the death of the first spouse to be used against the estate of the surviving spouse when they die. These rules apply where the surviving spouse dies on or after 9 October 2007
So to continue with the example, under the new rules, on John’s death there will still be no IHT due, as transfers between husband and wife are still exempt However, on Jane’s death the nil rate band not used on John’s death will available against Jane’s estate, as well as her own nil rate band The IHT payable will be based on £250,000 (£900,000 less the current nil rate band of £325.000 x 2)
Whilst the new rules certainly help, further careful planning could eliminate this bill entirely
There are many valuable IHT exemptions. The main ones follow Ensure you’re making full use of them!
£3,000 per tax year may be given by an individual without an IHT charge. An annual exemption may be carried forward to the next year but not thereafter
Gifts to individuals not exceeding £250 in total per tax year per recipient are exempt.
Gifts made out of income which are typical and habitual and do not result in o fall in the standard of living of the donor are exempt. Payments under a deed of covenant and the payment of annual premiums on life insurance policies would usually fall within this exemption.
A gift for family maintenance does not give rise to on IHT charge. This may include the transfer of property made on divorce under a court order, gifts for the education of children or maintenance of a dependent relative.
Gifts in consideration of marriage are exempt up to £5,000 if made by a parent with lower limits for other donors
Gifts to charities
Gifts to registered chorities are exempt provided that the gift becomes the property of the charity or is held for charitable purposes
When business or agricultural property is transferred there is a percentage reduction in the value of the transfer Often this provides 100% relief In cases where full relief is available there is little incentive, from a tax point of view, to make lifetime transfers of such assets. Additionally no CGT will be payable where the asset is included in the estate on death
However the reliefs may not be so generous in the future and therefore gifts now may be advisable.
What will happen to any business or agricultural property included in your estate on death? Leaving it to your spouse will waste any available relief Consider leaving such property to someone else
Life assurance arrangements can be used as a means of removing value from an estate and also as a method of funding IHT liabilities.
A policy can also be arranged to cover IHT due on death. It is particularly useful in providing funds to meet on IHT liability where the assets are not easily realised, eg family company shares
Have you considered a trust to ensure any life assurance proceeds are not taxable as part of your estate on death?
Trusts can provide an effective means of transferring assets out of an estate whilst still allowing flexibility in the ultimate destination and/or permitting the donor to retain some control over the assets. Provided that the donor does not obtain any benefit or enjoyment from the trust, the property is removed from the estate.
How we can help
Whilst some generalisations can be made about Inheritance Tax Planning advice it is always necessary to tailor any advice to your personal situation therefore if you need advice regarding Estate Planning or Inheritance Tax then please call Keith Rogers Accountants on +44 (0) 20 3145 0995 so we can arrange a No obligation FREE initial meeting at one of our offices. If you are interested in instructing us we will offer you a FIXED FEE service with no hourly charges or hidden costs. You have unlimited telephone support during our opening hours to assist you in making the correct strategic decisions. If you wish to view the other services that Keith Rogers Accountants offer then please visit our website KRA-Uk.com