INHERITANCE TAX PLANNING
Inheritance Tax is paid if a person's estate (their property, money and possessions) is worth more than £325,000 when they die. This is called the 'Inheritance Tax threshold'. The rate of Inheritance Tax (IHT) is 40% on anything above the threshold. Married couples and civil partners are entitled to double the allowance, or £650,000 before tax is payable. The rate may be reduced to 36% if 10% or more of the estate is left to charity.
In this article we are going to look at some simple ways in which you can reduce your IHT tax bill or eliminate it altogether. Here are 5 simple ways to reduce or eliminate your IHT tax bill which we will briefly cover in this article. It involves giving away your estate and assets while you are still alive. But remember you must do this before you die.
Make a gift to your partner
If you are married or in a civil partnership you can give all the assets you own to your spouse or civil partner. When you pass away there will be no inheritance tax to pay.
There is no Inheritance Tax to pay on certain gifts you make to family and friends during the course of the year. Below is a list of gifts that are classed as 'exempted gifts' by HMRC.
- You can give away £3,000 worth of gifts each tax year. This is known as your 'annual exemption'. You can also carry any unused annual exemption forward to the next year but only for one year.
- Wedding or civil ceremony gifts to friends up to £1,000/person. This increases to £2,500 for grandchildren or great grandchildren and up to £5,000 for a child.
- Gifts to charities and political parties
- Payments made for an elderly person's living costs or a child under 18
- Small gifts up to £250
You will usually not pay any IHT if you make an outright gift to someone during your lifetime subject to the 'seven year' rule. An outright gift is one in which you do not retain any benefit in the gift. You give away full ownership of the gift so that it is no longer part of your estate. It is a 'potentially exempt transfer' (PET) and will only become chargeable to inheritance tax if you die within seven years of making the gift. The IHT is charged as follows:
|Years between gift and death||Tax Rate|
|Less than 3||40%|
|3 to 4||32%|
|4 to 5||24%|
|5 to 6||16%|
|6 to 7||8%|
|7 or more||0%|
Anything you leave in your will to charity is free of Inheritance Tax. It will reduce your IHT and at the same time benefit a good cause. If you leave at least 10% of your estate to charity it will reduce the tax rate from 40% to 36%.
Setting up a Trust
If you put some or all of your assets into a qualifying trust those assets will no longer be part of your estate for Inheritance Tax purposes. However, some trusts are subject to CGT and their own tax regimes so you should seek sound professional advice beforehand.
Points to consider and be aware of
We at Tax Compute strongly recommend that you seek sound professional advice on estate planning as there are strict HMRC rules to adhere to. These rules can be easily and accidently overlooked so careful estate planning is essential. Below are some issues to consider:
- There can be tax implications on gifts from which you still retain some benefit. For example a house still lived in and maintained although given to someone else. This is referred to as a 'gift with reservation' and can be included as part of your estate. The 7 year rule does not apply unless some time later the reservation ceases.
- If you make a gift to a company or to a discretionary trust the gift maybe immediately chargeable and tax due if the total value of those gifts exceeds the taxable threshold.
- The value of a non-cash gift for inheritance tax is the amount of the 'loss to your estate'. This is worked out by looking at the value of your estate before and after you gave the gift. For example a rare set of Royal Worcester china may be worth £100,000. If you gift the cups and saucers worth £10,000 the remaining pieces may only be worth £20,000 as you have broken up the set. The value of the gift for inheritance tax is £80,000 (£100,000 - £20,000) and not the £10,000.
- The 7 year rule and the 14 year rule. Care needs to be exercised if you are considering making any transfers to a trust before the seven year period has expired on previous PETS. You could reset the clock from 7 years up to 14 years without realising it. So it is very important that you get the timing right and at the same time seek sound professional tax advice.
Author Roger Gunning FCMA CGMA
Tax Compute are Chartered Management Accountants regulated by CIMA. Tax Compute's offices are in Cheltenham and EC2 in the city of London. We are close to Moorgate and Liverpool Street underground stations.