The total number of estates liable to Inheritance Tax has increased every year since 2009-10 (source: HM Revenue & Customs Inheritance Tax Statistics 2015 to 2016, 3 August 2018). This is despite the introduction of several new and quite generous reliefs.
So the need for effective and practical intergenerational planning is still critical to achieve a better financial outcome for the whole family.
Inheritance Tax may be due if someone’s net estate when they die is worth more than the ‘nil rate band’, which is currently £325,000.
Your estate includes the value of your savings and investments, your home, and any other assets you own of value.
It also includes the value of any money or assets you may have given away in the seven years before your death.
Where tax is due, the rate of tax is normally 40% on the excess above the nil rate band.
Some of the key reliefs
Inherited nil rate band – if your spouse predeceases you and leaves all of their assets to you then you may also inherit their nil rate band. So this means that on the second death you may have an exempt nil rate band of up to £650,000.
Main residence nil rate band – this a new additional relief that can exempt some of the value of your main residence. It currently exempts up to £125,000 of property per person.
Some of the main ways of mitigating Inheritance Tax
Annual gift exemption – you can give away £3,000 a year and it will be immediately exempt from Inheritance Tax. You can give away more, but for larger gifts it would take seven years for those gifts to be exempt from Inheritance Tax.
Pensions – money in the majority of pension accounts are exempt from Inheritance Tax. We provide a lot of pension advice to help with retirement planning but increasingly also for family estate planning.
Trusts – they have long history in inheritance tax planning, but they are not to be entered into lightly. They are a complex area and can easily have tax consequences as well as benefits. We can help advise you if a trust would be suitable.
Some risks to look out for
The main residence nil rate band is only available when a property is left to children or other lineal descendants in the will, upon death. So those without children are not able to claim that particular relief.
If you give assets away then capital gains tax could become due. This can be a big issue for people who have buy-to let property for example. However, if still owned at death the asset would still be part of the deceased’s estate for inheritance tax purposes but no capital gains tax would be due.
If your estate is valued at more the £2,000,000 then the main residence nil rate band is reduced and could be lost entirely.
Have you considered
Whole of life insurance – we can arrange life insurances to help pay an Inheritance Tax bill.
Discounted Gift Trust – this is a popular trust that we can arrange that allows you to shield some of your savings from inheritance tax whilst still receiving an income from them.
Grandchildren pensions – people of any age can have a pension savings account! You could contribute £2,880 into a minor’s pension and have them receive a £720 ‘bonus’ in the form of tax relief. Research suggests young people today will need more pension savings than the current generation due to increased life expectancy and lower state pensions. If these are gifts out of income then they are not caught by inheritance tax, however, if they are reducing the capital then they could still be classified as a potentially exempt transfer and if you were to pass away within seven years of the gift they could still be included in the estate at death.
These are just a few of the things that need to be considered.
Inheritance tax and family estate planning is sometimes put off until tomorrow but we would recommend taking time out if possible to consider the value of your estate. If you think you might be affected, we would be pleased to discuss the position in more detail.