Inheritance Tax (IHT) is most often charged on an individual's estate following their death.
The first portion of the estate benefits from the nil rate band allowance (NRB), currently frozen at £325,000, and can be passed without tax being paid. The estate may also benefit from a transferable NRB (from a predeceased spouse) and/or a residence NRB. Any value in the estate not covered by these bands, or otherwise exempt (e.g. charitable) gifts will be chargeable to IHT at a rate of 40%.
According to the Office for Budget Responsibility (OBR), 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 them to consider the impact of:
- The jurisdiction in which the client is domiciled/resident for tax purposes
- The value of all the client's assets, including those owned by the client, in which the client has a beneficial interest, or over which they are able to exerts control
- The nature of the assets, and whether any tax reliefs might apply
- The identity of the proposed beneficiaries and whether any of them are exempt
- 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 of which a donor can take advantage. There are a number of exemptions which clients can use with confidence to make less significant gifts without risk of unintentionally reducing the nil rate band available upon death.
- Each individual has an annual exemption of £3,000 in each tax year. Gifts up to this value can be made without any IHT charge arising. It is also possible to make use of the small gifts exemption to give gifts valued up to £250 to each of any number of individuals each tax year. These two exemptions cannot be combined to the same individual so care should be taken when planning these gifts;
- Within certain financial limits, dependent on the relationship between 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 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 available for any individual to give away surplus income. This exemption is claimed by executors after the donor's death. HMRC will look for evidence of a 'settled pattern of expenditure' and the gifts must not erode 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 upon the value of these assets. It is strongly advised that professional advice be 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 loss of these valuable reliefs.
Gifts into trusts and other entities
We can advise individuals on lifetime creation of trusts or other structures into which assets can be transferred (given) as part of an IHT mitigation plan.
In addition to legal advice, we recommend that individuals seek financial advice prior to making any high value gift, to ensure 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 advisors, 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 while protecting your wishes 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
It is vital to consider the impact of other taxes; on income and capital gains, stamp duty land tax, and any business taxes prior to advising clients to give away assets with the aim of mitigating IHT, to avoid any unintended consequences for the client and their estate and beneficiaries.
Our expert legal team works with leading financial advisors to provide bespoke advice regarding lifetime giving and estate planning, helping you to achieve your aims with robust plans that meet the requirements of the complex legalities and financial regulation governing taxes.