The tax of choice, well that’s what they call it. Inheritance Tax has been around for a very long time in various different guises. It’s been called ‘Death Duties’, ‘Capital Transfer Tax’ and other names. But how much do you know about it and do you know if it will affect you. Statistically, it doesn’t affect a great deal of people, but depending on what statistics you read, something like 6% of estate’s pay Inheritance tax every year.
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So here is a whistle stop tour of IHT
This article is just for guidance and information. When making financial decision, always seek professional financial advice from a qualified and regulated financial adviser
Understanding Inheritance Tax
- Who pays the IHT liability – The executors of your estate will pay any IHT due before distribution of any assets
- Inheritance Tax threshold – Your estate can be valued up to £325,000 before any IHT is due
- Transfer of unused allowance – If you don’t use your allowance this can pass to your husband or wife and any amount of the allowance that has not been used
- Inheritance tax rate(S) – There are 3 rates! Most people think there is one. The 40% rate. However if you gift 10% of your estate to charity, the balance due is reduced to 36%. And if you gift more than the nil rate band into a Trust the lifetime charge is 20%
- When is it due to be paid – IHT has to be paid within 6 months of probate being granted
Contact Martin Dodd on 01902 742221 or email him at [email protected] if you would like talk about money issues.
What about Gifts
- Lifetime gifts – Potentially Exempt Transfer – You can gift assets away and they will be classed as a Potentially Exempt Transfer. What that means is, if you survive long enough no tax will be due
- Gifts with reservation – If you gift an asset away and still receive a benefit from it, it will still be regarded as part of your estate for Inheritance Tax purposes. Transferring the ownership of your home to your children will not work, unless you may a commercial rent for it
- Lifetime gifts – Chargeable Lifetime Transfers – Gifts over the nil rate band of £325,000 will attract a 20% tax charge on the excess
- 7 year rule – Any gifts made will be exempt from IHT if your survive beyond 7 years
- What happens between 3-7 years after making a gift – if you die between years 0 and 3, the full rate of IHT tax charge is payable. However if your death occurs after 3 years the level of tax due reduces year by year as follows
| Years between gift and death | Percentage of the tax you pay | Effective tax rate (if not qualified for reduced rate) |
| less than 3 | 100% | 40% |
| 3 to 4 | 80% | 32% |
| 4 to 5 | 60% | 24% |
| 5 to 6 | 40% | 16% |
| 6 to 7 | 20% | 8% |
What IHT exemptions are there that you can take advantage of?
- Annual exemption of £3,000 – You can gift a way IHT free £3,000 every year and if you did not do it last year, you gift £6,000 in this year. Better still if you are married you can double up to £12,000
- Wedding gifts – £5,000, £2,500 & £1,000 – To your children you give £5,000, to grandchildren and great grandchildren you gift them £2,500. For everyone else it’s just £1,000
- Gifts up to £250 – And you give away any number of £250 amounts to other people, so long as they are not in the list above
- Gifts out of income – You can gift out of income up to any amount, but they must be regular payments that do not diminish your lifestyle
- Charitable and Political party donations
- Business Property, Agriculture & Woodland Relief
So what else is exempt from IHT?
- Inter Spousal exemption – This may not actually in the long term reduce IHT, but nevertheless you can gift assets between husband and wife
- Pensions – Yes that right. A pension does not form part of your estate for IHT purposes. With the new pension rules, this could prove to be a very effective way of passing value down through the generations
- Certain types of ISA – Only recent have certain types of ISA become exempt from IHT. They have to be owned for at least 2 years prior to death, so if you have plan very quickly, this may prove a very useful strategy if you have a substantial ISA portfolio
- Death in Service Life Insurance cover – Most if not all Death in Service life assurance policies will provide you with cover that would not form part of your estate on death
- Life Insurance cover if set up correctly – Life assurance can be outside of your estate, but in order for this to be the case, it must be written in Trust. Otherwise, in the event of your death the life assurance payout will form part of your estate, which would only seek to exasperate th e IHT situation. If you are not sure if your life assurance cover is in trust, give me a call and we can help sort it out for you
IHT and your own home
- Joint Tenants – If you own your home with your husband/wife as Joint Tenants, on the first death your share will automatically pass to the survivor
- Tenants in Common – However if you own it as Tenants in Common, you have the potential to gift away your share of the home to someone else, thereby helping reduce the IHT liability
- Giving away your home – This has often been used, but in most cases does not work, unless a commercial rent is paid to the new owner if you remain living in the property. This would fall foul of the Gift with Reservation rules
- Having a valid Will – Whilst having a Will in itself will not help reduce your IHT liability, having one will ensure that your estate passes onto to whom you wish it to. Dying Intestate would mean that the law will decide how your estate is distributed, not you.
Inheritance Tax changes
- £1 million allowance for married couples – This will eventually happen by the tax year 2020/2021 and will happen in stages from 2017/2018 onwards. The £1 million allowance is only for married couples and £500,000 for unmarried people. If you co-habit, you will have £500,000 each, so if your estate is over £500,000 on the first death, IHT will be payable. The table below shows the individual amount increases year by year until the full allowance is reached
- £100,000 in 2017 to 2018
- £125,000 in 2018 to 2019
- £150,000 in 2019 to 2020
- £175,000 in 2020 to 2021
- What if your estate is over £2 million – After £2 million you will start to lose the additional new allowances on a £2 for £1 basis. For every £2 of estate over £2 million, you will £1 of allowance
What options do you have to plan for Inheritance Tax
- Do nothing and pay the tax – Some people are happy to allow their estate to be taxed and many do
- Gift away assets – Gifting some of your assets away is an option, but you have to be careful that Capital Gains Tax (CGT) is not applied to the assets you gift away. Money is the easiest way to gift some of your estate away as it is not liable for CGT
- Arrange a Trust fund to pay the IHT liability – A life assurance policy set up in trust to cover the IHT liability is a very e3ffective way to plan for the tax. Provided you are in good health and have the income, this is not only a very effective way to plan for the tax, it is also unlikely that you would pay in more that the amount of cover that would be paid out. Contact me if you would like to know more about how to arrange this effectively
- Put assets into a Trust – Slightly more tricky, because this in most cases is a bespoke way of reducing IHT and as such is likely to be more costly. Specialist Trusts can be arranged to help pass some of the value of your estate to the next generation, whilst still keeping control of the asset. There would be nothing worse than seeing some of your estate being squandering or worse still disappear in a divorce because you gave the asset away absolutely in your lifetime. Again, please contact me if you would like to know more about how to set up a Trust
- Invest in exempt assets – I’ve mentioned a few exempt assets already. If you have a business, this will usually qualify for Business Property Relief, but it must be trading company. It cannot be an investment company. Typically buy to let properties held in a company do not qualify.
- Invest in pensions – The new generational planning tool following the Pension Freedom rule changes. Pension funds can now pass from one generation to the next. For the first time in decades pension are now being seriously considered as not only income providing in retirement, but also a way to pass on wealth
- Get married – This is an old favourite, but not being married can seriously damage your family wealth on death. Effective use of the 2 nil rate IHT allowances is much easy if you are married
- Spend it! – I’ve saved the best until last. You spent most of you adult life building up your assets. Maybe now is the time to enjoy at least some of it. Take that world cruise, buy the sport car you always wanted. As they say you can’t take it with you, so you may as well enjoy.
Action call
If you have concerns about Inheritance Tax or any of the content of this article, please contact me. We may not have a complete solution, but some saving may be better than none.
And finally, I’ll leave you with this anonymous quote – “You don’t want to be the richest man/woman in the graveyard”
This article does not provide specific advice and you should always seek professional advice from a qualified adviser before making any decisions.
Contact Martin Dodd on 01902 742221 or email him at [email protected] if you would like talk about money issues.
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