Inheritance tax is most often charged on an individual's estate following their death.
The first portion of every estate benefits from the nil rate band allowance (NRB), currently frozen at £325,000. As a result, up to £325,000 worth of assets will pass free of inheritance tax (IHT). The estate may also benefit from a transferable NRB (from a predeceased spouse) and/or a residence NRB. Any value in the estate that is not covered by these allowances, or is not otherwise exempt (e.g. assets that are passing to a surviving spouse or a charity), will be subject to IHT at a rate of 40%.
According to the Office for Budget Responsibility, British families' IHT bills have hit a 35 year peak and exceeded £4 billion for the first time this year. It is anticipated that even with the introduction of the residence NRB, receipts from IHT will grow to £5.6 billion by 2020/21.
Many of our clients seek to reduce their future tax liabilities, while protecting their assets and protecting their families.
We work with you to consider the impact of:
- the jurisdiction in which you are domiciled/resident for tax purposes;
- the value of all your assets, including those owned by you or in which you have a beneficial interest, or over which you are able to exert control;
- the nature of the assets and whether any tax reliefs might apply;
- the identity of the proposed beneficiaries and whether any of them will benefit from tax exemptions; and
- the value of any lifetime gifts and whether any reliefs or exemptions might apply.
Lifetime giving to reduce IHT on death
Gifts to individuals
There are a number of valuable IHT exemptions and reliefs which you can take advantage of.
- Each individual has an annual gifting exemption of £3,000 in each tax year. Gifts up to this value (in total) can be made without any charge to IHT arising. It is also possible to make use of the small gifts exemption to make gifts of up to £250 to any number of individuals each tax year. These two exemptions cannot be combined for the same individual so care should be taken when planning these gifts.
- Within certain financial limits, dependent on the relationship between the donor and donee, gifts made to one or both parties to a marriage, made prior to the wedding (in consideration of marriage) are exempt from IHT.
- Any gifts, irrespective of value, made to a registered charity during a person’s lifetime are exempt from IHT and there are also well known income tax benefits available by making use of gift aid arrangements.
A very useful exemption for giving away small or large sums is for you to give away ‘surplus income’. This exemption can be claimed by executors after the donor's death. HM Revenue and Customs will look for evidence of a 'settled pattern of expenditure' and the gifts must not erode the donor’s capital assets, nor affect the donor's standard of living. Careful record keeping is essential to assist executors in making this claim. There is no limit on the value of gifts made using this exemption, so long as the conditions are met.
Special treatment of particular assets
If an estate includes a business, farm, woodland or National Heritage property, some relief from IHT may be available on the value of these assets. It is strongly recommended that professional advice is sought to ensure that these valuable assets can be inherited by the intended beneficiaries with the benefit of the full reliefs available. Care must be taken before making lifetime gifts of such assets to avoid the risk of losing these valuable reliefs.
Gifts into trusts and other entities
We can advise you on the lifetime creation of Trusts or other structures into which assets can be transferred as part of an IHT mitigation plan.
In addition to legal advice, we recommend that you seek financial advice, prior to making any high value gifts, to ensure that future financial needs (for capital and income) have been assessed and that you don't make any gifts which could affect your standard of living.
We can also work with financial planners to consider a range of financial products and structures which may have beneficial tax treatment.
Changes to pension legislation in the last few years has opened up additional IHT mitigation opportunities. Working together with financial advisers, we can consider if your current pension arrangements can be restructured to take advantage of these opportunities. We can also review any current nominations and pension bypass Trust arrangements to see if these can be made more tax efficient whilst protecting your assets for your family.
Planning through wills
Flexibly drafted wills, created with IHT mitigation in mind, may enable your executors to further minimise any IHT liability for your estate after your death.
It is worth noting that a gift to charity of more than 10% of your net estate will reduce the overall tax rate on death from 40% to 36%. Careful drafting of your will is essential if you wish to ensure the benefit of this reduced rate.
Impact of other taxes
We will consider the impact of other taxes (including income and capital gains tax, stamp duty land tax and any business taxes) prior to advising you on the gifting of your assets with the aim of mitigating IHT, to avoid any unintended consequences for you and your estate and beneficiaries.
Our expert legal team works with leading financial advisers to provide bespoke advice regarding lifetime gifting and estate planning, helping you to achieve your aims with robust plans that meet the requirements of the complex legalities and financial regulations governing taxes.