What is Inheritance Tax Planning, and how can it work for you?

Our Director and Head of Private Client Tax Heather Miller explains how Inheritance Tax Planning can work for you. 

Inheritance Tax (IHT) is payable at a rate of 40% on estates worth over £325,000 at the date of death. It can also become due on certain lifetime gifts of assets, at a reduced rate of 20%. That said, there are planning opportunities available that can mitigate the tax due on your estate, be it gifts of assets to family and friends, charitable donations, or the use of a Family Trust. The most important thing is that this planning is bespoke to you and helps to achieve your wishes for your estate after you are gone.

When should I plan for IHT?

Generally speaking, it’s never too early to plan for IHT. Most people tend to consider tax planning around the time that they first make a Will, or if they are planning to rewrite their Will, as the two exercises go hand in hand. If you have an estate worth more than £325,000 (or £650,000 for couples) then it is worth exploring the options. This threshold is known as the Nil-Rate Band (NRB).

Why now?

One advantage of planning early is that when you make a gift, the “7-year clock” starts ticking. Provided you have made an outright gift (i.e. that you no longer benefit in any way from the asset you have gifted), if you live for 7 years then the value of your gift falls entirely outside of your estate for IHT purposes.

What do I need to consider?

  • The value of your assets now, and how this may change over time
  • Ensuring that your own financial security is preserved, especially when making lifetime gifts
  • The long term needs of your family and whether your current Will reflects your wishes

How do I balance the needs of my family with my own?

Whilst outright gifts can be the most straightforward way of planning for IHT, you may not want to do this. This is often when we can consider Trusts or Family Investment Companies as part of a long term plan to involve your family and friends in your wealth, without the need to relinquish it completely during your lifetime.

What if I own a business?

A trading business will usually attract Business Property Relief at a rate of 100%, meaning that you can pass it to your successors with no IHT consequence. That said, there are specific criteria to consider when looking at the trading status of a company, and it is worth reviewing this regularly.

I am non-UK domiciled, does that make a difference?

Yes, it does. Usually, a non-UK domicile’s estate is only liable to IHT on their UK situs assets. A UK domiciled individual is liable on their worldwide estate. Additionally, a couple wishing to leave their estate to each other on death can do so free of IHT if both are UK domiciled. Where the receiving spouse is non-UK domiciled, however, the maximum that can be left is the Nil-Rate Band of £325,000. Establishing where an individual is domiciled can be a complex area, and is often not simply down to where that person was born. It is also possible for long-term residents of the UK who were born abroad to become “deemed domicile” in the UK for IHT purposes, or those formerly domiciled in the UK to return here and revert to their original domicile.

What about my main residence?

Often your most valuable asset is the home that you live in, but gifting this asset in your lifetime is unlikely to remove it from your estate for IHT purposes if you continue to live in it following the gift. In addition to the usual NRB, the Government has introduced a specific relief (the Residence Nil-Rate Band) for those who leave their main residence to a direct descendant; a couple can now leave a property worth up to £1million free of IHT so long as their overall estate is valued at less than £2million. If this doesn’t apply, it may be possible to reduce the value of your taxable estate to below this threshold, thereby securing the RNRB.

Conclusion

It is fair to say that with the right planning, IHT can be mitigated so that your beneficiaries receive a greater proportion of your estate both during and after your lifetime. If you would like to discuss how Price Bailey can help you structure your affairs efficiently for IHT, make an appointment with one of our team today.

This post was written by Head of Private Client Tax and Director, Heather Miller. To find out more about how we can help you with your inheritance tax planning, you can contact Heather using the form below.

We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.

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