The latest official figures from HMRC show total inheritance tax receipts are up by a staggering 6% to £11.2bn on the same time last year. While this is largely because of rising house prices in many areas of the UK, it is also down to a more hard-line stance on inheritance tax by HMRC.
Unfortunately, too many people are not seeking professional advice and are being left exposed to the effects of the death tax. If left too late or handled incorrectly, Inheritance Tax (IHT) can cost you and your loved ones a substantial amount of money.
However, with careful tax planning and the right advice, the effects of IHT can be reduced. As a start, you should start thinking about you inheritance tax planning in your forties. Thereafter, you should review your position roughly every 7 years.
To give you a head start, we’ve put together a beginner’s guide to inheritance tax planning try and help you save money on your IHT bill…
IHT is a tax which is paid on all of your assets after you die. It is charged at 40% on everything above £325,000. If the total value of your estate is less than this you won’t pay IHT – this figure is known as the nil-rate band.
Your estate includes everything you own such as property, land, possessions, shares, savings and other assets you hold. For business owners, this can be a complex issue (business structure can have significant tax implication) so it’s worth speaking to a specialist.
If your estate is entirely inherited by a spouse or civil partner, they don’t have to pay IHT due to spousal exemption. Plus, your Nil Rate Band (NRB) can be passed on to a spouse or civil partner, which means that when they die they’ll have a nil-rate band of £650,000.
There is also a recently introduced Residence Nil Rate Band (RNRB) which adds an additional £100,000 to your IHT free allowance. This is set to rise incrementally to £175,000 in 2020. To qualify you must own a property (or a share in a property) and leave it to your direct decedents (children, grandchildren etc.).
Joe Bloggs owns a house worth £300,000 and has other assets worth £200,000. His total estate is £500,000.
RNRB would first apply leaving his allowance at £400,000. This is £75,000 above the nil-rate band, therefore the total amount of IHT would be 40% of £75,000 = £30,000.
Lifetime transfers and gifts
A reduced 20% rate of IHT is applied for chargeable lifetime transfers (CLTs). This includes gifts to companies, relevant property trusts and gifts made by close companies.
Potentially exempt transfers (PETs) are any gifts made during your lifetime to an individual. There is a general rule that any gift made within 7 years of death is added on to your estate. Once this 7 year mark passes, it becomes an exempt transfer and is not liable for IHT. However, there is some relief if a PET is made more than 3 years before death – this is known as ‘taper relief’ and increases in conjunction with the time.
Up to £3,000 may be given by an individual without an IHT charge, and this can allowance can be carried forward for one year.
On top of your £3,000 allowance, small gifts not exceeding £250 per tax year per recipient are exempt. You can make a gift of £250 to any number of people in any given year.
Wedding gifts up to the value of £5,000 may be made by a parent, with lower limits for others (£2,500 for grandparents and £1,000 for others).
Gifts from surplus income are also tax-free. This includes things like transfers to a child’s savings account or paying a premium on a partner’s life insurance.
IHT rate is reduced to 36%, providing 10% or more of a net estate (after deducting exemptions, reliefs and the nil-rate band) is left to a charity. You can do this by leaving in your will or donating money to a charity when you’re alive. This is known as a charitable legacy, and you will often find that a charity will help you write your will for free if you include a charitable gift.
Joe Bloggs has a total estate worth £500,000.
Applying the NRB and RNRB leaves a net estate of £75,000. He donates 10% to charity, leaving £67,500. The lower rate of IHT then applies, which means the total amount of tax due is £24,300.
This is an ultimate saving of £5,700 on IHT from the previous example.
Other types of relief
Two more technical aspects of IHT are Business Relief (BR) and Agricultural Property Relief (APR). Depending on how much of a business you own, you can receive either 50% or 100% tax relief on it. Similarly, for agricultural farm land you can receive 50% or 100% relief, with factors such as lease and time owned affecting the ultimate amount.
We have a useful Inheritace Tax calculator to help you determine how much inheritance tax you may need to pay. However, if planned correctly, it may be possible to reduce this amount.
If you’d like a free, no-obligation consultation to review your IHT position or would like inheritance tax planning advice, use our contact form to request a meeting with one of our personal tax advisors.
Want to know more? Call us on 0191 2699 960 or email firstname.lastname@example.org