Inheritance Tax Planning
On your death, your estate will be assessed on your potential inheritance tax (IHT) liability. This is a charge on any assets you own at the date of your death, alongside any gifts you may have made in the 7 years up to your death (please note not all gifts are taxable) and if you give away assets in your lifetime but retain use of it.
Inheritance Tax Allowances
We each have an allowance of up to £325,000, this is known as the Nil Rate Band (NRB) and is taxable at 0%. Anything over this amount is then taxed at 40%.
In 2017, a Residence Nil Rate Band (RNRB) was introduced. If your estate is above the basic NRB, then the estate may qualify for the RNRB before any tax is payable. Your estate can apply for the RNRB if you give a property in your Will to a direct descendent. In the tax year of 2020-21, the RNRB is £175,000.
Since 2007, the unused NRB (and RNRB if the first spouse died after 2017) of a spouse or civil partner can be transferred on the death of the second spouse/civil partner. Transfers between spouses/civil partners are exempt from IHT. Therefore on the second death of married couple/civil partner, the estate could have up to £1 million taxable at 0%.
Residence Nil Rate Band
As discussed above, your estate must qualify for the RNRB. Your property must a domestic property and be your principal place of residence and you must pass it to direct descendent. A direct descendant includes a child, grandchild, adopted, step or foster child, and the spouse or civil partner of each of those beneficiaries.
You can only claim up to £175,000 or the value of your property, whichever is the lowest. For example if your property is worth £125,000 then you can only claim £125,000, not the full £175,000.
If you downsize or sell your property before your death, the RNRB may still be available.
If your estate is worth more than £2 million then the allowance is then gradually reduced by £1 for every £2 the estate is worth more than the £2 million threshold. Consequently, estates worth £2.2 million (or £2.7 million if you inherit an unused allowance from your spouse or civil partner) is unable to benefit from the RNRB.
Exempt gifts
There are various gifts which are exempt from IHT and gifts which are potentially exempt if you survive 7 years since making those gifts.
Examples of exempt gifts are as follows:
Annual allowance
Each person has an annual allowance of £3,000 in each tax year. You can gift up to £3,000 in any tax year and this will be exempt from IHT. Any unused annual allowance from the previous year can be carried forward, however your unused allowance can only be carried forward one year.
Small gifts up to £250
Any gifts not exceeding £250 can be made to any one person who has not benefited from the gifts made above. These gifts are not taken into account in arriving at the £3,000 annual allowance. However the small gifts are only exempt if the total given to any one person in a tax year in not more than £250.
Gifts made from income
Regular gifts (i.e. by standing order) made out of income (after tax) and which would otherwise be saved or spent as disposable cash is exempt. It is key to note such regular gifts must not affect your standard of living. There is no fixed minimum period that the regular gifts must be made.
Gifts for “the maintenance or training” of a child
Any gift towards to maintenance of a child who is under 18, or over 18 but in full-time education or training, or is dependent upon you due you a physical of mental disability, is exempt. These gifts can be made until the child reaches 18 or until the full-time education or training has ended.
Gifts on marriage
Gifts in consideration of marriage or civil partnership are exempt. The gift must be made on or soon before or after the marriage or registration. The gift is only exempt when the marriage or registration takes place. The value of the gift is dependent on the relationship of the giver and recipient:
• If you are a parent, you can gift £5,000.
• If you are a grandparent, you can gift £2,500
• If you are any other relation, you can gift £1,000
Gifts to charity
Any gift to a UK registered charity is exempt.
Gifts to political parties
Any gift to a political party is exempt, so long at the party has at least one Member of Parliament.
Potentially exempt gifts / potentially exempt transfers (PET)
PET include any gifts over the value of the annual allowance and are added together during any period of 7 years. On your death, the value of all gifts made within the previous 7 years is set against your NRB or the balance of it after previous gifts. If the NRB is exceeded, later gifts are taxable at the full IHT rate as part of the estate.
Gifts which therefore exceed the annual exempt limit and made within 7 years before death have to be reported to the Revenue when an Inland Revenue is required to be submitted on death.
Issues to consider
Aside from the 7 year rule, it is key to be aware that any gifts given during your lifetime are no longer your assets. This means that if you have made a gift of property or cash, and the recipient divorces or becomes bankrupts, the value of the gift can be taken into account to offset any debts or in divorce settlements.
If you make a lifetime gift and retain a benefit from the item and do not pay full market rent for any occupation or use of the gift, this is known as a gift with reservation and the full value of the gift will be taken into account for IHT calculations.
Reliefs
If you have a business or agricultural asset that you gift in your Will, then the estate can apply for a relief of IHT. This may reduce the value of the gift by 50& or 100% for IHT purposes.
There are very complex rule associated with both business and agricultural relief, therefore it is essential to obtain professional advice to check whether or not your assets would qualify.
Additional considerations
It is worthwhile noting, some assets do not fall into your estate therefore are not assessed in your IHT calculations. One of the most common example is an insurance policy written in trust for a nominated beneficiary or a pension fund which has a nominated beneficiary.
Our Fees
If you are looking for inheritance tax planning advice, you will need to contact us to get a quote.
FAQs
What is Inheritance Tax?
Inheritance Tax is a tax on the estate (property, money and possession) of someone who has died. This is only charged on part of the estate that is above the threshold. The standard Inheritance Tax rate is 40%. If you leave more than 10% of your estate to charity then this rate is reduced to 36%.
Are all estate liable for Inheritance Tax?
In short, no. There is normally no Inheritance Tax to pay if either the value of the estate is below the Nil Rate Band (NRB) threshold or everything above the NRB threshold is passed to the deceased’s spouse, civil partner, a charity or community amateur sports club.
What is the Inheritance Tax threshold?
Each person has a “Nil Rate Band” threshold of up to £325,000.
There is also a “Residence Nil Rate Band” (RNRB) available to qualifying estates. This is increasing year on year and in the tax year of 2020-21, the estate can claim up to an additional £175,000. An estate can qualify for the RNRB if the deceased has passed a residential property to a direct descendent such as a child or grandchild.
If you are married or in a civil partnership and your estate is worth less than your threshold, since 2007 any unused threshold can be added to your partner’s threshold when you die. Therefore in 2021, a married couple could have up to £1 million taxed at 0% on the second death.
Who pays Inheritance Tax?
Funds from the estate are used to pay Inheritance Tax to HM Revenue & Customs (HMRC). This is done by the person dealing with the administration of the estate. Inheritance Tax must be paid before the estate is distrusted to the beneficiaries (people who inherit the estate).
Can I give gifts to my family during my lifetime to prevent paying Inheritance Tax?
It is your choice whether you give gifts to your family during your lifetime, however it is worthwhile knowing some gifts you give while you’re alive may be taxed after your death. This depends on the type of gift, the value of the gift and when you gave it. There is not an answer to fit all questions regarding gifts and Inheritance Tax, therefore it is strongly advised you seek further advice from a professional for accurate advice.
What is the ‘7 year rule’?
Any gifts made within 7 years of your death can be taken into consideration for Inheritance Tax calculations. If you have made a gift, and survive 7 years from the date you made that gift, it will not be considered towards the value of your estate for Inheritance Tax purposes.
