Inheritance Tax Planning
Planning to minimise the liability to IHT is a team effort involving you and your professional adviser. To enable long–term objectives to be set, it is necessary to make decisions about your finances and your family.
When should I plan for IHT?
Now! IHT is currently payable where a person’s wealth is in excess of £325,000 (2015–16). Thus, if you own your own house and have some savings, life assurance policies, or business assets, your estate could be liable.
Most gifts made during your lifetime will be entirely exempt from IHT if you live for seven years after making the gift.
How does IHT work?
When you die, IHT will be charged on your personal wealth, together with all or a proportion of your lifetime gifts made in the preceding seven years.
The full rate of tax is 40%, but this is reduced on a sliding scale for gifts made between three and seven years before your death.
What do I need to consider?
You must think about the following:
- The value of your assets now, and how this may change as time goes by
- Your own financial security
- Your family’s future needs
What about my financial security?
You need to make sure that you and your spouse are properly provided for, particularly in retirement. It would not make sense to give assets to your children only to find that in later life you need to ask for some or all of them back!
And what about my family?
You need to think about what degree of control you would want your children to have over any assets you may transfer to them.
You also need to work out how much your spouse would need if you were to die first. This would, of course, have to be reflected in your Will.
In addition, you need to find out the intentions of parents or elderly relatives about their own assets.
How does IHT affect my business?
In general, a business you control will attract business property relief of 100%. In other words, your business can be passed on with no IHT being paid.
Assets owned by you but used by a partnership in which you are a partner, or a company you control, attract business property relief of 50%.
Similar reliefs apply to agricultural property.
What can I do to reduce the IHT bill?
- Transfers of assets between spouses and civil partners are exempt from IHT, but other lifetime gifts may be more tax–efficient.
- Lifetime gifts are potentially exempt from IHT, and there is no limit on such transfers, so this is an excellent way of transferring assets that you do not need to keep in your estate. It may be advisable to cover substantial gifts by insurance against death within seven years.
- Trusts let you transfer assets out of your estate for IHT purposes, but enable trustees to exercise some degree of control over the capital or income (and you can be a trustee). There may be an IHT charge, but this would be at 20%, and then only if the transfer is over £325,000 (2015–16).
- Life assurance policies (unless designed to cover IHT liabilities) should be assigned during your lifetime so that the proceeds do not form part of your estate on death. The most common assignees are spouses, family members, and trusts.
- A reduced rate of 36% applies to death estates where 10% or more of the net estate is left to charity.
Concession for couples
The IHT standard threshold of £325,000 (2015–16) defines the upper limit of what is commonly known as the IHT nil–rate band.
There is a concession for married couples and civil partners. With effect from second deaths on or after 9 October 2007 the unused percentage of the nil–rate band from the first death estate can be carried forward and added to the nil–rate band available to the second. This combined threshold for couples is therefore set at a maximum of £650,000 for 2015–16.
This arrangement applies no matter how long ago the first death occurred.
- On the first death none of the original nil–rate band was used because the entire estate was left to a surviving spouse. Then if the nil–rate band when the surviving spouse dies is £325,000 that would be increased by 100% to £650,000
- If on the first death the chargeable estate was £107,500 when the nil–rate band was £215,000 (1997/98), then 50% of the original nil–rate band would be unused. If the nil–rate band when the surviving spouse dies is £325,000, then that would be increased by 50% to £487,500.
This fact sheet shows that we are living in an age of IHT planning opportunity. What you do is your decision, but the sooner you enlist the help of professional advisers the better. Remember, successful IHT planning has to be a team effort.