Managing Inheritance Tax – Do you really know where your money is going?
Do you know how many estates in England and Wales fall liable to pay Inheritance Tax in any given year? In Government statistics published in July 2017 for the year 2014/15 the answer was 23,000.
Interestingly, whilst the numbers of estates liable to tax has increased overall since 2008-09, the average tax liability remained roughly constant within each estate band up to 2013-14. This is due in part to the more effective use of exemptions and reliefs.
Good news you might say but in order to avoid being one of the 23,000, are you taking adequate steps to secure the financial future of your family?
We believe that ‘planning for tomorrow’ is a sensible outlook to have and we have set out below some of the possibilities that, if put in place correctly, will give you peace of mind, as well as keeping your hard-earned cash where it should be, in your pockets!
Some of the possible benefits of these options could be the difference between setting up your loved ones for life, and leaving debt after you have gone…
Wills: It is important to ensure that you not only have a valid Will in place to control how your assets pass and prevent paying any unnecessary tax on death, but also to consider carefully how to utilise fully all the available exemptions and reliefs during lifetime and on death to maximise tax efficiency and reduce your overall inheritance tax (‘IHT’ liability. For example, if you die intestate (without a Will) leaving children, only £250,000 plus half the remainder of your estate goes to your spouse on your death. The remainder passes to your children at age 18 and is potentially taxable. In addition to the tax implications, major problems can arise if ownership of the family home is divided between the surviving parent and young children, including having to sell it to pay the tax. Will planning may also enable you to make best use of the new residence nil rate band.
- Life Insurance: Your potential IHT liability can be funded by life insurance held in trust for your surviving spouse and/or children. If taken out early and for a fixed term only, the cost can be modest.
Potentially Exempt Transfers: Although a capital gains tax charge may still apply (if the gift is not of cash), the IHT rules allow you to pass any amount to any individual with no IHT provided you survive for seven years.
Normal Expenditure out of Income: Gifts out of income can be free of IHT. This is a particularly useful exemption as there is no upper limit to the value of this category of gifts provided the gifts do not affect the standard of living of the donor and no need to survive any period. This exemption is intended to be used where an individual earns more than they spend. The gifts should be out of excess income, be well documented and a pattern of gifts should be established. Giving in this way also prevents capital accumulating which would otherwise increase the inheritance tax liability on death.
Business and Agricultural Property Relief: IHT reliefs for owning business and agricultural assets are very generous:
a) Business property – “This relief is not available in relation to businesses where the focus is on investment in stocks, property or holding other investments.
b) Agricultural property – “To qualify for the relief, the property should essentially be a working farm run for commercial purposes.
Gift and Loan Trusts: These types of trust are more complex, involving structures provided by insurance houses, but are accepted by HMRC as effective. They can be of use where clients want to give away assets but need to retain some benefit from them, as they allow withdrawal of an ‘income’ of up to 5% of the amount invested, each year over 20 years.
Annual Exemption and Small Gifts: Gifts of up to £3,000 each year are entirely exempt from inheritance tax. It is possible to carry forward any unused portion of this exemption to the following year. Therefore if this exemption has not used in the previous year, a couple could give £12,000 with no inheritance tax consequences. It is also possible to make gifts of up to £250 to as many people as you want so long as no one receives more than £250. If the gift exceeds £250 no part of the gift is exempt.
Pensions: Pensions can now form a key part of any estate planning given that they can be passed to younger generations completely free of IHT and in a way which minimises any income tax liabilities.
In conclusion, although there are pitfalls, such as the ‘gifts with reservation’ rules, and potential capital gains tax issues, there are a number of planning options which can be put in place to mitigate IHT.
To find out more about how we can help you to mitigate your potential inheritance tax liability please contact Elena Tzialli.
The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.
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