Inheritance Tax Planning

1. Write a will

Without one the intestacy rules will apply which means that the law decides what happens to the inheritance. This can leave the surviving spouse with financial uncertainty and a potential charge to Inheritance Tax. For those who are not married and have no living descendants, but who have considerable assets, making a will is also a wise move. Under the intestacy rules their estate will automatically pass on to their parents rather than any siblings. This in turn could increase the future Inheritance Tax liability for those siblings.

2. Check your IHT allowances

Each individual has a £325,000 tax-free allowance (the nil rate band) and Inheritance Tax applies to the value of the estate above this amount at a rate of 40 per cent. In addition individuals can claim an additional £100,000 residence nil rate band (RNRB) to offset the sale of a family home after death. This will rise to £175,000 by 2020 meaning that an individual will be able to give away £500,000 tax-free in total.

These allowances are transferable between partners, meaning that a couple will be able to pass on up to £1 million Inheritance Tax free. Estates valued at more than £2 million will, however, have RNRB tapered away. Properties left in trusts are not eligible nor are buy-to-let properties or properties that are not the main residence.

3. Use available exemptions

Up to £3,000 a year can be given away in your annual allowance, exempt of any Inheritance Tax. There is also a small gift exemption which means you can give £250 away to any number of people. Wedding gifts up to £1,000 per person and donations to qualifying charities are also exempt from IHT. Parents can gift up to £5,000 on their child’s marriage and grandparents can give £2,500.

4. Make gifts out of income

For Inheritance Tax free gifts to qualify they must form part of normal expenditure and derive from income. They must also not be seen to reduce your standard of living. As this exemption can only be claimed by the executors of your estate it is important to keep good records of any gifts made in this way.

5. Identify capital losses

If you hold assets which have fallen in value since they were purchased these can be gifted without attracting Capital Gains Tax. This capital loss can be carried forward and set against any future gains. If the value recovers and after a period of seven years, the gift would then be considered a potentially exempt transfer and not part of the estate.

6. Take out life cover

Life cover is often used as a means of protecting an estate from Inheritance Tax, especially where there is uncertainty about who should inherit, or if the owner wishes to keep assets, possibly for income purposes. Fortunately, the life assurance market is currently very competitive, particularly for whole life policies.

7. Consider using trusts

You can gift an amount up to the £325,000 nil rate band per individual into a discretionary trust. This amount doubles for a married couple and the process can be repeated every seven years. Further amounts can be gifted into a discretionary trust but anything above the allowance will incur a lifetime transfer tax of 20 per cent. Trusts can also allow CGT rollover, continuing control over the assets while ring fencing and protecting them for beneficiaries.

8. Retain access to income

The general rule is that an individual cannot give away a ‘gift with reservation of benefit’. That means they cannot hand an asset over while still receiving income from that asset. This might apply for example to a holiday home gifted to children but which the parents still make regular use of.

There are however specifically designed discounted gift trusts which provide immediate Inheritance Tax saving on a gift while making the capital exempt after a period of seven years. The right to income can also be maintained.

9. Consider business property relief

It is possible to invest in discretionary management services which provide investment into unquoted companies. These are Inheritance Tax exempt after a period of two years. This requires professional advice due to the higher risks involved with this type of investment.

10. Make gifts to charity

Charitable gifts are exempt from IHT. If you give 10 per cent of your net estate then the rate of Inheritance Tax on the remainder falls to 36 per cent. Many people make charitable gifts in their will so this is an important consideration.

Inheritance Tax planning is a complex business and professional advice should always be obtained before making any decisions. We advise clients on all aspects of Inheritance Tax planning and would be delighted to discuss specific cases.