Inheritance Tax

As Benjamin Franklin said, the only things certain in life are death and taxes, and unfortunately inheritance tax brings both together!

Inheritance tax (IHT) is a tax levied on the transfer of an individual’s estate on his/her death to non-exempt beneficiaries. Estates don’t pay inheritance tax if the total value falls within the ‘nil rate band (currently £325,000), but tax is then paid at 40% on any sums exceeding this threshold (reducing to 36% if at least 10% is left to a charity).

New for the 2017/18 tax year is the ‘main residence’ allowance, which is valid where the main residence is passed to a direct descendant (children, step-children, grandchildren). This is gradually being phased in and for 2017/18, it starts at £100,000 (giving a total allowance of £425,000), rising by £25,000 each year until it reaches £175,000 (a total allowance of £500,000) in 2020.

Whilst people employed in certain roles (including armed forces personnel, police, firefighters, paramedics, and humanitarian aid workers) are exempt from paying inheritance tax if they die in active service, most of our clients are not and, although shares in their companies will generally be covered by Business Property Relief (BPR), we are always keen to review inheritance tax matters to assess likely estate values and potential IHT liabilities. In the first instance, there are some basic steps that can be taken to reduce exposure to IHT.

Take advantage of annual exemptions – You can give £3,000 away each tax year inheritance tax-free.

Donations – Gifts to charities and political parties are inheritance tax-free

Gifts in consideration of marriage are tax-free – If your son/daughter (£5,000 limit), grandchild (£2,500) or anyone else (£1,000) is getting married then you can give them gifts to these limits IHT-free.

Potential Exempt Transfers (PETs) – Gifts made to another individual are Potentially Exempt Transfers (PETs). A PET is assumed to be an exempt transfer at any time between the making of the gift and either the seventh anniversary of that date or the death of the transferor. If seven years pass after the date of the gift then the transfer is exempt. Any transfers made up to three years before death are chargeable and it is only after three years that the charge tapers as follows:

Tax charge on gifts within 7 years of death
Years before death 0–3 3–4 4–5 5–6 6–7
% of death tax charge 100 80 60 40 20

Give away surplus income – where an individual has recurring excess income, this increases the value of their estate. However, there is an important exemption from IHT for giving away surplus income. Referred to as the ‘normal expenditure out of income’ exemption, it depends on setting up a regular pattern of giving away excess income. So, if this applies, careful thought should be made to setting up regular gifts to children or grandchildren for example. The sooner this is instigated, the easier it is to establish a pattern of normality.

Setting up a Trust – The idea of establishing a trust may seem daunting, however, using a trust can be a very tax efficient way of reducing the estate of the donor plus it can also contribute to the IHT planning of recipient beneficiaries. There are several types of trust and essentially when money or property is placed in a trust, provided certain conditions are satisfied, you won’t own it any more and it might not count towards your estate. However, trust law is complicated; most gifts into trust are now subject to inheritance tax even if made during your lifetime. This is an area where it is vital to get professional advice.

The above basic steps can often be overlooked and are an important starting point for everyone. We are speaking more and more to clients about IHT matters and trying to assess possible estate values and potential IHT liabilities. The key point is that if you think your estate may be liable to inheritance tax, then plan in advance. There are opportunities for tax efficient planning if you put them in place in good time and returning to Benjamin Franklin, these are a lot easier addressed before death rather than after!


Posted by Andy Harper

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