Inheritance Tax Planning Guide
Proper estate planning is essential to ensure that your loved ones inherit from your estate as you would wish when you die. A key component in estate planning is looking at how much Inheritance Tax will be payable upon your death.
- Inheritance Tax is the tax levied on a person’s money, property, and possessions after their death.
- The sum of a person’s money, property, and possessions is known as their estate.
If you think your estate might have to pay Inheritance Tax, there are some planning measures you can take to reduce the amount payable. Like most things, Inheritance Tax benefits from early planning. The sooner you think about it, the better.
Inheritance Tax is a highly complex area. You should not take any action (or not act) to limit Inheritance Tax without proper advice specific to your circumstances. There are severe penalties for breaking the tax rules or if incorrect or incomplete information is given to HMRC.
For bespoke legal advice on your circumstances, contact our specialist team today.
Inheritance Tax is normally paid by the Executor (person named in your Will) or an Administrator (when no Will is in place) from the funds in the estate. If there is no money in the estate, then it will be paid from money raised from the sale of assets, such as property.
Assets that would normally form part of your Estate for Inheritance Tax are items such as:
- Your home (and contents)
- Your vehicle(s)
- Shares or investments
- Bank and building societies
- Jewellery
- Other valuable possessions
- Any foreign property
- Anything you have given away within the seven years prior to your death
- Anything that you have given away at any time where you have retained some sort of benefit
- Interests in some sorts of trusts
Married couples and civil partners are normally allowed to pass their estate, including assets of any amount, to their spouse tax-free when they die. This means you do not have to pay Inheritance Tax on assets passing to your spouse or civil partner. If you do this then your surviving spouse or civil partner benefits from an increased IHT allowance on their death, of up to double.
Following your death, your Executor must first value your estate, calculating how much it is worth, and then submit full details to HMRC. Your Executor then must pay the Inheritance Tax bill on delivery of the account to HMRC. Once your Executor has paid the IHT, they can then apply for a Grant of Probate to access and distribute your assets. If you are an Executor and need advice or help, contact our friendly probate team for more information.
After your death, your Executor must check how much your estate is worth, deducting any debts and funeral expenses.
If your estate is valued above the Inheritance Tax threshold – currently £325,000 – then your Executor will need to pay IHT at the rate of 40% on everything over this amount unless IHT exemptions or relief apply. The first £325,000 is taxed at 0%: this is sometimes called the ‘nil-rate band’.
Inheritance Tax is normally due within the six-month period after your death. However, if Inheritance Tax must be paid with regards to land, business assets or property, the Inheritance Tax may be paid by instalments over a period of 10 years although interest on the undue tax will be charged.
Inheritance Tax bills that are paid late will usually have interest added to them as a result of the delay in payment.
Planning Ahead For Inheritance Tax
By writing a Will, you determine what happens to your money after you die. This will help ensure that matters are dealt with in a tax-efficient way, especially if you seek advice from a specialist Will Writing Solicitor. Our expert team strive to give our clients confidence and security in knowing they have planned ahead with bespoke legal advice. If you would like our advice, get in touch today.
You can pass on money, property, or possessions as gifts without paying any tax, if you survive for seven years after giving it to the recipient. If you die within the seven-year period but more than three years after the gift and you have gifted more than the nil-rate allowance within the seven-year period, then the tax you pay is reduced.
Anyone can give away up to £3000 a year and pay no tax. This is known as the annual exemption. If unused, this allowance can be carried over to the following year, up to a maximum of £6000.
Important: if you are the recipient of a gift, and the giver has died within seven years, and has already given away more than £325,000, you could be liable to pay IHT yourself.
Gifts of up to £250 a year to any one recipient get excluded from Inheritance Tax – so it could be a good idea to give this comparatively small amount to a large number of your relatives in regular stages.
Currently, you can give up to £5000 as a gift when your children are marrying; £2500 to a grandchild or great grandchild and £1000 to anyone. This is tax free, and you are also able to give per person.
Many people make donations to charities in their Wills – these donations are exempt from Inheritance Tax.
A family trust may be a suitable method to keep assets within the family whilst still controlling their use. They can be set up with as little as £500 in them.
Family trusts can be effective in sheltering assets from claimants in the event of a business or relationship breakdown. They can also be used to make provision for a child or dependant without giving the money outright to that person straight-away.
For in-depth bespoke advice around creating a Trust, contact our team.
One of the more complicated areas of IHT planning relates to property. The amount of IHT that is paid on a home depends on several factors including how it was owned and how it was passed on.
If you leave a property that you own in its entirety in your Will, then the value of the whole home will be included in the estate for Inheritance Tax purposes. If you are a joint tenant with your partner, then they will automatically inherit your share of the house upon your death. IHT is not payable if your spouse continues to live in it.
If you pass on your home as a gift to your children or a loved one, then it is treated as a gift and therefore falls under the seven-year rule. If you continue to live in the home without paying rent, then IHT will need to be paid even after the seven-year period – this is known as a ‘gift with reservation of benefit.’
Giving your home away and moving out – you can give away your home but make social visits and short stays there without impacting the seven-year rule.
Giving away part of your home to someone who moves in – you can give away half of your home to your children or loved ones and this will be excluded from the estate valuation as long as the bills are split, and you live there for more than seven years after giving it away.
Giving away your home and living in it – you will need to live in the home with the new owner and pay the going rental rate of a similar property when you live there.
Selling your home and giving away the money – you can sell your home and giveaway the proceeds to your children or loved ones, but again, this will be treated as a gift and the seven-year rule applies.
Note: It is important to consult a solicitor if you are thinking about giving away or selling your home. You should also seek advice on Capital Gains Tax. This note only summarises some of the main points. You should seek detailed advice about how IHT rules may affect you.
Land used for agricultural purposes can qualify for Inheritance Tax relief after you have owned it for seven years, and only two years if you are farming it. If the land qualifies this is a valuable relief but the rules are complex, and it is important that you get proper advice from a solicitor who is knowledgeable about this area, such as our specialist team.
When you are sorting your affairs, managing Inheritance Tax can feel like a minefield and be a daunting prospect to negotiate. Paying someone to provide tax advice and sort through your affairs for you can become a good investment when you compare it to the amount of money that can potentially be saved. It is important that you seek professional advice as Inheritance Tax planning is a complex process. It will be a well worth investment and can save you money in the long run.
Emily Shearing
Emily is Head of Wills and Trusts within our Private Client Department.
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