27th April 2017
Inheritance Tax, or IHT, is a sometimes costly tax payable on death out of your estate. On assets above the exempt nil rate band (currently £325,000) the tax rate is 40%.
Some tax planning measures that can help combat IHT include:
Inherited nil rate band
Assets left to a spouse are not immediately subject to IHT. If all the assets are left to the spouse, the deceased’s nil rate band is also passed over to the survivor so on second death the amount exempt from IHT could be up to £650,000.
Money in a pension scheme is mostly exempt from IHT and can be passed to any beneficiary of your choosing. Multi-generational pension planning is now an option.
Because you can hold up to £1m in a pension fund the pension is now a very important asset in terms of IHT planning.
Residential nil rate band
A new residential nil rate band, being phased in over four years, will initially exempt £100,000 of the individual’s main residence, rising to a maximum of £175,000 from 6 April 2020.
This is a valuable relief but there are a number of pitfalls, for example:
- It can only be offset against the individual’s main residence. If you down size you could still claim the exemption but you may need to document the process.
- The main residence relief is only granted if the residence is left to a direct descendant. It would be good practice to review your will if there are other beneficiaries because if they share in the proceeds of your house the relief could be compromised.
- It is only for individuals with under £2m assets at death. The value of an individual’s business is taken into consideration for the new £2m threshold test, even though the business itself may be exempt from IHT. This is often overlooked but needs to come into the planning.
Giving money and assets away is one of the more traditional ways of dealing with IHT.
It is important to note it takes seven years for a gift to be excluded from your estate.
It is also important to consider whether there are any immediate capital gains tax charges that the gift could trigger.
Business Property Relief (BPR)
Business assets and some agricultural assets can benefit from IHT exemptions.
A common problem however is that if you sell your business at the point of retirement the cash you get in exchange is no longer exempt.
One way to continue to benefit is to invest some of your proceeds into BPR qualifying investment funds.
Inheritance Tax is a complicated subject and this article is by no means exhaustive. If you would like to discuss your Inheritance Tax position please contact the partner responsible for your account.
And remember, there are few simpler and more satisfying ways to save on inheritance tax than to spend a little more on yourself!
Our in house Financial Advisers can review and set up pensions for you.