Dubbed ‘the most hated tax in the UK’,
inheritance tax (IHT) is a tax paid by a person who inherits money, property or any form of possessions from a person who is deceased. Government receipts from 2018 show that Inheritance Tax contributed
more than £5bn to total tax revenue for the year.
Thresholds and reliefs
At present, there is typically no inheritance tax to pay if either:
- The value of your estate is less than £325,000, or
- You leave everything in excess of the £325,000 threshold to your spouse, civil partner, a charity or a community amateur sports club.
There may in some circumstances be a higher exempt amount if there is a qualifying residential property in the estate and the property is left to a lineal descendent.
However, there is no need to dispair. There are some steps you can take to lower your inheritance tax bill, four of which are highlighted in this blog.
1. Be clear on the assets within your estate
It is important to
define the assets within your estate, as some assets are exempt from inheritance tax.
To highlight the importance of this, we have created the below examples for you.
Example A
When Mr Arnold passed away on the 14 April 2019, his net assets were worth £1.5m.
If all of Mr Arnold’s assets were subject to inheritance tax, the calculation would look like this.
| Value of estate at time of death |
£1,500,000 |
| Less exempt amount |
£325,000 |
| |
|
| Value of estate subject to IHT |
£1,175,000 |
| Tax due at 40% |
£470,000 |
However, if included in the estate of Mr Arnold, there are some exempt assets, which would not be included in the value of the estate when IHT was calculated. For example, Mr Arnold has exempt assets of £500,000 and other assets of £1,000,000 when he dies on 30 June 2019.
Example B
| Value of estate at time of death |
£1,500,000 |
| Less exempt assets |
£500,000 |
| |
£1,000,000 |
| |
|
| Less exempt amount |
£325,000 |
| Value of estate subject to IHT |
£675,000 |
| Tax due at 40% |
£270,000 |
As you can see, by holding exempt assets, the inheritance tax payable has been reduced by £200,000.
However, for these assets to qualify for exemption, two conditions must be satisfied:
- The exemption only applies for certain types of assets
- These assets need to be held for a minimum period before the date of death
Some of these exempt assets are as follows:
- Shares quoted on the Alternative Investment Market (min period: two years)
- Shares in other unquoted trading companies (min period: two years)
- Agricultural land farmed by the owner (min period: two years)
- Agricultural land if let under a farm business tenancy (min period: seven years).
2. Gifts to family and friends
Making a gift to close family members and friends whilst alive can help in reducing inheritance tax liabilities.
What you gift and to who is entirely up to you, but ensuring that it is tax-free requires a little bit of planning.
In simple terms, as long as you live more than 7 years from the date you make the gift, the receiver of the gift will not have to pay any inheritance tax on the gift when you pass away.
If unfortunately you do not live longer than 7 years after making the gift, the beneficiary may become liable to pay IHT.
If you intend on gifting money and assets to relatives and friends, make sure to keep a record of the following:
- Who was gifted
- What was gifted
- When it was gifted
- How much the gift was worth
Taking these steps will make it easier for the executor of your estate to calculate what is and is not liable for tax.
3. Gifts to your spouse
When you pass away, your spouse/civil partner can inherit your entire estate tax-free.
The tax-free allowance of £325,000 can also be passed on to the surviving spouse as well.
However, if a wife passes away, and in her will leaves her whole estate (worth £260,000) to her sister, the husband will only be entitled to the remaining £65,000 of his wife’s nil rate band on his own death – strictly speaking this is expressed as the fraction of the nil rate band that is unused, ie £65,000/£325,000 which is 1/5th.
If at the time of the husband’s death the nil rate band has increased to £400,000, the exemption he can receive from his wife will be £80,000.
Gifting to your spouse is not the only option. There is a number of exemptions when it comes to
gifting third parties.
NB – IHT may be payable when the gift is made to an unmarried partner.
4. Consider property transfer options
If children live with their parents – and where this is likely to continue for some time – the parents may gift a share of the property to the children.
For capital gains, this is a gift to connected parties and so is deemed to occur at market value for capital gains tax purposes; it may be exempt if covered by the private residence relief of the parents.
The children’s acquisition cost will be deemed to be the market value at the date of transfer. For inheritance tax purposes, this will be a potentially exempt transfer made by the parents.
It can give rise to a tax charge under the provisions relating to reservation of benefits provisions, which occur if the parents continue to derive any benefits, other than a negligible one, from the property that is the subject of the gift. Fox example this will be the case of the parents give the property to their children but continue to live it without paying a market rent.
The reservation of benefits provisions can be avoided if the children live in the house with the parents and do not bear more than their fair share of the running costs of the home. This means the tax charge can be avoided if for example the parents continue to meet all the running costs of the property.
The risks can also be reduced by not giving too large a share of the home to the children; to this end, an equal ownership by all involved may be advisable.
Moore & tax planning
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trust and estate planning and
wealth management, as well as assistance with day to day matters such as
tax returns. We ensure easy access to the right people, so decisions can be made quickly and confidently.
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