There are many reasons to put off thinking about inheritance tax, particularly as it is not the cheeriest of subjects. However, taking some simple steps now could help to reduce or entirely mitigate a future inheritance tax (IHT) bill on your estate.
IHT is levied at a rate of 40% on chargeable estates but there are various reliefs and allowances available including:
- Nil rate band - £325,000 can be passed on IHT free, with an additional £175,000 available where the main home is passed on to a direct descendent. Married couples each qualify for these allowances, giving total relief of up to £1 million. Transfers of assets between spouses are exempt from IHT.
- Annual exemption – each individual has an annual exemption of £3,000 per year which can be carried forward by one year if unused.
- Regular gifts out of income – gifts made as normal expenditure out of income are exempt from IHT.
- Other gifts – Small gifts of up to £250 per person per year can be made free of IHT, along with gifts of any size to UK registered charities. Wedding gifts of between £1,000 and £5,000 (depending on the relationship between the couple) are also exempt.
- Charities – the 40% IHT rate is reduced to 36% where the individual leaves at least 10% of their net estate to charity.
- Reliefs – business property relief (BPR) and agricultural property relief (APR) effectively remove (or reduce) the value of many business interests and farms from the charge to IHT.
In addition to making use of the various exemptions and reliefs, some simple planning may also help to reduce an IHT bill. At a minimum you should ensure that a Will has been made, is up to date and has been drafted tax efficiently. Further IHT planning could include the use of trusts, banking BPR and APR reliefs, maximising pension contributions and having your life assurance written under trust.
Putting aside a bit of time now to think about the future and addressing the elephant in the room, will help to ensure that your estate is divided up as per your wishes to avoid any family conflict, whilst also reducing your tax exposure.