Depending on the size of your estate, a large proportion of it may be payable to HMRC in inheritance tax when you pass away.
On your death, you will have a nil rate band sum of money which is tax free on your death which currently stands at £325,000. A transferable nil rate band may be available if you are married and/or a resident’s nil rate band if you are leaving a residential property to a direct lineal descendant.
Anything over and above this is likely to attract inheritance tax at a rate of 40% so one of the most straightforward ways to make sure tax isn't charged unnecessarily is to consider giving away assets when alive or creating trusts when planning for your death.
Jessica Rowbotham, private client solicitor at Wake Smith, looks at the tricky area of gifting and trusts.
Gifting
One way of reducing the size of your estate with a view to reducing inheritance tax liability on your death is to make gifts from your estate during your lifetime.
The first £3,000 gifted by each person in each tax year is tax free. In addition, if the previous year’s allowance was not fully used, the amount remaining can be carried forward for the maximum of 1 year (i.e. the total allowance at any time can be up to £6,000 per person).
Gifts not exceeding a total of £250 each tax year can be made to any number of people who have not benefitted from the gift above. These are then not taken into account when arriving at the £3,000 limit.
Gifts made to a spouse or civil partner, charity, political party or for national purposes are always exempt from inheritance tax.
Certain other gifts may be exempt from inheritance tax. For example: regular gifts made out of disposable income. To qualify as an exemption the gifts must not affect the person giving the gift’s standard of living and must be made from cash which would otherwise be saved or spent as disposable income. Some gifts on marriage may also be exempt, but this depends on the relationship between the giver and receiver. Gifts made for maintenance or training of the giver’s child may also be exempt.
Any gift given which is not exempt and is above the limits mentioned above, is termed a “potentially exempt transfer” and will form part of your estate if you die within seven years of making the gift, meaning it will use part, or all, of your nil rate band allowance. If you survive seven years, the gift will fall outside of your estate and therefore it will not use any of your nil rate band and no inheritance tax will be payable on the gift.
Separate rules govern gifts made into a trust.
Trusts
When planning for your death you may also wish to consider the use of trusts. There are many types of trust but two common examples include:
Property trust wills – these trusts are set up under your will and may benefit those who co-own their property with their spouse.
On the first death, instead of leaving your property to each other, you can leave your share into a life interest trust. Under this trust your spouse can continue to live at the property for their lifetime, but then after their death your share is to pass to named beneficiaries, for example your children.
A benefit of this is that it safeguards your share in the property for future generations. It also means that should your spouse get remarried, your share on their death will go to your children, and not under your spouse’s will, or under the laws of intestacy which may well dictate that their estate goes to their new spouse depending upon the value of the overall estate.
The property trust wills allow more flexibility to the surviving spouse as they would have the ability to sell the existing property and upsize or downsize, and would have a right to live in the property rent free without restriction.
Discretionary trusts – the distribution of assets comprised within a discretionary trust is at the discretion of the trustees, who can allocate assets from the trust at their discretion to any of the named beneficiaries. The trustees decide which beneficiary gets what from the trust, and when.
These trusts are useful in many circumstances, for example for the use of a vulnerable beneficiary. The vulnerable beneficiary then does not inherit the trust assets outright, but the trustees control the trust assets for the benefit of that beneficiary.
Jessica added: “This is a complex, specialist area of the law. It's worth speaking to a professional for advice on your specific circumstances. The team at Wake Smith can help you.”
For further details please contact Jessica Rowbotham at [email protected] or on 0114 224 2160.
