One of the biggest impacts on your ability to preserve your wealth and your estate is Inheritance Tax. Put simply if you don’t make the right financial arrangements, your family could potentially have to foot a hefty Inheritance Tax bill in the event of your premature death. Passing assets efficiently to the next generation should remain a primary objective for many who have spent a lifetime accumulating their wealth. Providing funds for family members or a charitable interest is also an important way to see the benefit of your wealth during your lifetime, as well as leaving a legacy.
Inheritance Tax is payable on everything you have of value when you die, including your home, jewellery, savings and investments, works of art, cars and any other properties or land you own – even if they are overseas. Any part of your estate that is left to your spouse or registered civil partner will be exempt from Inheritance Tax. The exception is if your spouse or registered civil partner is domiciled outside the UK. The maximum you can then give them before Inheritance Tax may need to be paid is £325,000. Unmarried partners, no matter how long standing, have no automatic rights under the Inheritance Tax rules.
Where your estate is left to someone other than a spouse or registered civil partner (for example, to a non-exempt beneficiary), Inheritance Tax will be payable on the amount that exceeds the nil-rate threshold. The current threshold is £325,000. Inheritance Tax is payable at 40% on the amount exceeding the threshold. The threshold usually rises each year but has been frozen at £325,000 for tax years up to and including 2020/21.
Every individual is entitled to a nil-rate band (that is, every individual is entitled to leave an amount of their estate up to the value of the nil-rate threshold to a non-exempt beneficiary without incurring Inheritance Tax). If you are a widow or widower and your deceased spouse did not use the whole of his or her nil-rate band, the nil-rate band applicable at your death can be increased by the percentage of nil-rate band unused on the death of your deceased spouse, provided your executors make the necessary elections within two years of your death.
Since 6 April 2017, an Inheritance Tax ‘residence nil-rate band’ is available in addition to the standard nil-rate band. It’s currently worth up to £175,000 for 2020/21. It starts to be tapered away if your Inheritance Tax estate is worth more than £2 million on death. Unlike the standard nil-rate band, it’s only available for transfers on death. It’s normally available if you leave a residential property that you’ve occupied as your home outright to direct descendants. As a number of conditions apply, we recommend you review your Will with us if you’re hoping to rely on the residence nil-rate band.
HM Revenue & Customs (HMRC) permits you to make a number of small gifts each year without creating an Inheritance Tax liability. Each person has their own allowance, so the amount can be doubled if each spouse or registered civil partner uses their allowances.
You can also make larger gifts, but these are known as ‘Potentially Exempt Transfers’ (PET), and you could have to pay Inheritance Tax on their value if you die within seven years of making them. Any other gifts made during your lifetime which do not qualify as a PET will immediately be chargeable to Inheritance Tax. These are called ‘Chargeable Lifetime Transfers’ (CLT), and an example is a gift into a discretionary trust.
The taxation rules of CLTs are complicated, and you should discuss this with us if you are considering a CLT. Also, if you make a gift to someone but keep an interest in it, it becomes known as a ‘Gift With Reservation’ and will remain in your estate for Inheritance Tax purposes when you die.
HMRC permits you give the following as exempt transfers; up to £3,000 each year as either one or a number of gifts. If you don’t use it all up one year, you can carry the remainder over to the next tax year. A tax year runs from the 6 April one year to 5 April in the next year. Gifts of up to £250 to any number of other people – but not those who received all or part of the £3,000.
In addition any amount from income that is given on a regular basis, provided it doesn’t reduce your standard of living. These are known as gifts made as ‘normal expenditure out of income’. If your child is getting married, you can gift them £5,000; if a grandchild or more distant descendent is getting married, you can gift them £2,500; and a friend or anyone else you know, you can gift them £1,000.
There are also certain other gifts that can qualify for relief from Inheritance Tax. These can include gifts of a small business, sole trader enterprise, or partnership and shares in companies listed on the smaller, more risky stock exchange, the Alternative Investment Market (AIM). Farmers can gain up to 100% relief from Inheritance Tax when making gifts of certain agricultural land or farm buildings. But the rules in both these situations are complex, and you’d be best to seek expert advice before gifting anything away.
If you don’t want to give away your assets while you’re still alive, another option is to take out life cover, which can pay out an amount equal to your estimated Inheritance Tax liability on death. Taking out a life insurance policy written under an appropriate trust could be used towards paying any Inheritance Tax liability.
Under normal circumstances, the payout from a life insurance policy will form part of your legal estate, and it may therefore be subject to Inheritance Tax. By writing a life-insurance policy in an appropriate trust, the proceeds from the policy can be paid directly to the beneficiaries rather than to your legal estate, and will therefore not be taken into account when Inheritance Tax is calculated. It also means payment to your beneficiaries will probably be quicker, as the money will not go through probate.
Through the use of wills, trusts and Inheritance Tax planning we are able to help with this structuring, making sure that as much of your money and assets goes to those you chose rather than to HM Revenue & Customs.
The value of investments and income from them can go down. You may not get back the original amount invested.
Tax treatment is based on individual circumstances and may be subject to change in the future.
Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from taxation, are subject to change.
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