Written by 06/08/2020
When a person passes, Inheritance Tax (IHT) becomes due on their estate. IHT can also fall due on some lifetime gifts but most are ignored providing the donor survives for seven years after the gift.
Strategies used to minimize the impact of IHT include Nil Rate Bands, charitable giving, lifetime gifts, estate planning, the use of trusts, and Annual or Regular Exemptions.
Its important to seek specific professional advice that is appropriate to you and your circumstances, a tailor-made solution is almost always necessary.
Your Will is also imperative in mitigating this tax and should always be kept up-to-date.
Strategies
Transferable nil rate band
The rate of tax on death is 40% and 20% on lifetime transfers where chargeable. For 2020/21 the first £325,000 chargeable to IHT is at 0% and this is known as the Nil Rate Band.
It is possible for spouses and civil partners to transfer the nil rate band unused on the first death to the surviving spouse for use on the death of the surviving spouse/partner. On that second death, their estate will be able to use their own nil rate band and in addition the same proportion of a second nil rate band that corresponds to the proportion unused on the first death. This allows the possibility of doubling the nil rate band available on the second death.
Charitable giving
A reduced rate of IHT applies where 10% or more of a deceased’s net estate (after deducting IHT exemptions, reliefs and the nil rate band) is left to charity.
Lifetime gifts
Lifetime gifts fall into one of three categories:
- a transfer to a company or a trust (except a disabled trust) is immediately chargeable
- exempt gifts which will be ignored when they are made and also on the subsequent death of the donor, e.g. gifts to charity
- any other transfers will be Potentially Exempt Transfers (PETs), IHT is only due if the donor dies within seven years of making the gift. An example of a PET is a gift to another individual.
Estate planning
Much estate planning involves making lifetime transfers to utilise exemptions and reliefs or to benefit from a lower rate of tax on lifetime transfers. However, careful consideration needs to be given to other factors. For example, a gift that saves IHT may unnecessarily create a Capital Gains Tax (CGT) liability.
Use of trusts
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. We can advise you on whether a trust is suitable for your circumstances and the types of trust arrangements available.
Life assurance
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 an IHT liability where the assets are not easily realised, e.g. family company shares.
Exemptions
Annual exemption
An amount of £3,000 per annum may be given by an individual without an IHT charge. Any unused annual exemption may be carried forward, one year only, for use in the tax year that immediately follows.
Gifts between spouses
Gifts between spouses are generally exempt, if both are either UK or non-UK domiciled. It may be desirable to use the spouse exemption to transfer assets to ensure that both spouses can make full use of lifetime exemptions, the nil rate band and PETs.
Residence nil rate band
An additional nil rate band was introduced for deaths on or after 6 April 2017 where an interest in a qualifying residence passes to direct descendants. The amount of relief is being phased in over four years. It was £150,000 for 2019/20 and is now £175,000 for 2020/21.
For many married couples and registered civil partnerships, the relief is effectively doubled as each individual has a main nil rate band and each will also potentially benefit from the residence nil rate band. The residence nil rate band can only be used in respect of one residential property, which does not have to be the main family home but must at some point have been a residence of the deceased.
Restrictions apply where estates (before reliefs) are in excess of £2 million. The residence nil rate band may also be available when a person downsizes or ceases to own a home on or after 8 July 2015.
Small gifts
Gifts to individuals not exceeding £250 in total per tax year per recipient are exempt. The exemption cannot be used to cover part of a larger gift.
Normal expenditure out of income
Gifts which are made out of income which are typical and habitual and do not result in a fall in the standard of living of the donor are exempt. Payments under deed of covenant and the payment of annual premiums on life insurance policies would usually fall within this exemption.
Wedding presents
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 charities are exempt provided that the gift becomes the property of the charity or is held for charitable purposes.
If you want to find out more or would like to enquire about our Wills & Estate Planning, contact Guille on the details below.
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