With property prices having risen over the last few years, you don’t have to be hugely wealthy to be affected by Inheritance Tax (IHT). More families are calculating the value of their estates and finding they have a greater liability than they’d thought. However, the good news is that expert planning can legitimately reduce the tax payable, allowing you to pass on more of your assets to your family as you’d intended.
IHT is payable on money, savings or any other assets in your estate, and potentially on some gifts you make during your lifetime. If the estate is liable for IHT, it is payable at 40 per cent. The current individual threshold is £325,000, and any unused nil rate band can be passed to the surviving spouse or civil partner on death.
In addition, there’s a residential nil rate band that applies (£100,000 in this tax year, reaching £175,000 by 2020) if you want to pass your main residence to a direct descendant like a child or grandchild.
Ways to limit your exposure
We can advise you on ways in which you can legitimately reduce the amount of IHT that would be payable on your estate.
For instance, it’s vital to have a valid will in place; spouses and civil partners can transfer assets between them free of tax, but if you die intestate, then IHT could become payable.
To reduce the tax bill, you can consider giving assets away during your lifetime. These are called ‘potentially exempt transfers’. For these gifts not to be counted as part of your estate on your death, you must outlive them by 7 years. If you die within 7 years and the gifts are worth more than the nil rate band, taper relief applies, meaning the tax will be less the longer you survive.
Gifts that are exempt
Each financial year you can make gifts of up to £3,000 (in total, not per recipient) and you can carry any unused allowance over to the next year, which means you could give away up to £6,000. Gifts of £250 to any number of people are exempt.
Weddings are another opportunity to make tax-free gifts. Each parent of a bride or groom can give up to £5,000; grandparents or other relatives can give up to £2,500 and any well-wisher can give £1,000.
A strategy tailored to your needs
We can also advise you how you can make gifts from your surplus income, and how you get relief from IHT if you pass on relevant business assets, and some types of agricultural land. It can be worth considering putting some of your cash, investments or property into a trust, as by doing so, they will no longer form part of your estate for IHT purposes.
One thing is certain, if you feel that your estate is likely to be subject to IHT, you should obtain in-depth professional advice that looks at all aspects of your requirements, lifestyle and goals, and develops a financial strategy that meets your needs. If you could use some practical, no-nonsense advice, then please do get in touch.
Tax treatment varies according to individual circumstances and is subject to change.