Inheritance tax planning is not something people like to think about. Unfortunately though it should not be ignored as it involves the only two certainties in life, as famously cited by Benjamin Franklin, death and taxes.
WHAT IS INHERITANCE TAX?
Inheritance tax (IHT) is paid on an individual’s assets when they die and on certain settlements on trusts or gifts during their lifetime.
RATES AND THRESHOLDS
The standard rate of IHT is 40% on the value of an estate above the IHT threshold (currently £325,000). This is reduced to 36% if at least 10% of the individual’s estate is given to charity on death.
A new residence nil rate band has also been introduced, allowing value of up to £125,000 (for 2018/19) to pass to a direct descendent free of IHT.
By 2020, the potential inheritance tax free amount will reach up to £1 million for couples, a highly marketed figure by the government. There are, however, some caveats and conditions to this, including a restriction on the residence threshold where the estate is worth more than £2 million.
PLANNING AHEAD
Planning early on could help to significantly reduce a future inheritance tax bill. Before looking at where tax can be saved, however, a number of decisions need to be made.
For example, whether you would like to begin passing down your wealth now and, if so, whether this will be out of income or capital, or a combination of both. Taking an overall view of your current assets and income, as well as projections for the future, will help to ensure that you can still live the lifestyle you wish whilst beginning to pass down your wealth in a tax efficient manner.
The key benefit from passing down assets or gifting money whilst still alive is no inheritance tax will be due on those assets on death, providing they were gifted more than seven years before.
Certain lifetime gifts are also exempt from IHT, even if death occurs within seven years, including:
- Gifts to UK registered charities
- Small gifts of up to £250 to any number of people
- Wedding gifts (limits depend on the relationship with the married couple but a minimum of £1,000)
- Gifts made as normal expenditure out of income.
If you are not in a position to start passing down your assets and/or income or want to enjoy your wealth in the current term, it is still possible to plan for the future and ensure that reliefs and allowances can be maximised on death.
Ensuring Wills are drafted tax efficiently and up to date, is a good first step. Leaving assets qualifying for reliefs such as Business Property Relief and Agricultural Property Relief to children rather than a spouse can also help to ensure that these reliefs are not wasted.
Also, the use of trusts and/or legacies to a charity can be considered.
HOW WE CAN HELP
We can help with inheritance tax planning, cash flow modelling and tax efficient investments. Our tax and financial planning experts work together to ensure that your tax bill is minimised whilst protecting your wealth.