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What is Inheritance Tax Planning?
The purpose of Inheritance Tax planning is to minimise the sums of tax payable to HMRC on your death, so that you can pass as much of your estate as possible to your chosen beneficiaries.
Due to the rise in the value of property and the Inheritance Tax threshold before tax is payable on an estate being frozen until 2026, more people are having to consider Inheritance Tax planning.
What is Inheritance Tax (IHT)?
- Inheritance Tax is a tax on the estate of someone who has died.
- The current law allows for an individual’s estate to be a value of £325,000 before any Inheritance Tax is payable. This sum is known as the nil rate band.
- If the net value of an individual’s estate exceeds £325,000, then IHT could be payable at a rate of 40% on any value over the nil rate band.
Example: If your estate is worth £500,000. The first £325,000 of your estate would be free from Inheritance Tax. The value of your estate on which Inheritance Tax is payable would be £175,000 (£500,000 – £325,000). Therefore, the tax payable on your death would be £70,000 (40% of £175,000).
- If your estate is worth more than £325,000, your estate may be eligible to claim the Residence Nil Rate Band (RNRB).
- The RNRB is an additional allowance of £175,000 that a person, who died on or after 6 April 2017, who leaves their main residence to a direct descendant can claim.
- If an individual is eligible to claim the RNRB it can increase their tax free allowance before IHT is payable to £500,000.
- There are certain conditions which can affect the amount of the RNRB an individual is able to claim.
Are any assets exempt from Inheritance Tax?
There are a few assets that may be exempt from IHT. These are detailed below.
Gifts to a spouse
- A gift of assets passing to a person’s spouse is exempt from Inheritance Tax.
Gifts to charities
- Gifts made to a charity are exempt from Inheritance tax.
Business and Agricultural Property
- If certain business or agricultural assets form part of a person’s estate, and meet certain conditions, those assets could pass on to a person’s chosen beneficiary without any inheritance tax being payable on the value of them.
How do I plan for Inheritance Tax?
Making a Will
- One of the most effective ways you can plan for IHT is by making a Will.
- A carefully drafted Will can ensure that assets are left to your chosen beneficiaries in a tax efficient way.
- Making a will with a professional can ensure that you receive the correct advice relating to your estate and any steps that you could take in your lifetime to mitigate IHT payable on your death.
Pensions and Life Insurance Policies
- It may be possible to reduce the value of your estate liable for inheritance tax by paying in to a pension or life insurance policy.
- If your pension or life insurance policy is nominated, it is usually written in to a trust and any benefit is at the discretion of the trustees. It would therefore not be deemed as part of your estate for IHT purposes.
- It is advisable to check with the pension or policy provider as to whether the funds would pass outside of your estate.
- Making life time gifts is an effective way of reducing the value of your estate for Inheritance Tax.
- You must live for seven years after making a gift of money, or items of value, exceeding your annual allowance for its value to no longer form part of your estate for IHT.
- You can make gifts accumulating to the sum of £3,000 in any given tax year to any individual free from IHT.
- A legal professional or Independent Financial Provider will be able to advise you on the best way of making life-time gifts to suit your circumstances and requirements.
- If you place sums of money in to a trust during your life-time, and provided certain conditions are met, such assets may not be treated as part of your estate for IHT purposes.
- A trust can be a good way of providing a gift to vulnerable or minor beneficiaries whilst retaining some control of the asset or protecting it until they become of age.
- As there are many different types of trust, with varying taxation rules, it is important to obtain advice from a professional to ensure that you pick the right type of trust to meet your requirements.
For more information on Inheritance Tax and our further Private Client services you can visit our web pages here. You can get in contact with a member of the team here or by using the form on this page. Alternatively, you can call us on 01453 847200.
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