Reducing your inheritance tax burden
If your estate exceeds certain allowances, then it may be subject to inheritance tax upon your death. Your estate will only be subject to inheritance tax should its value exceed the “Nil Rate Band” (currently £325,000). If you leave your residence to direct descendants, then you may also be able to claim the “Residence Nil Rate Band” (currently £175,000).
Inheritance tax is applied on death to the value of the estate exceeding the Nil Rate Band (and the Residence Nil Rate Band if applicable), at the rate of 40%. If your spouse or civil partner predeceases you, then you may also be able to carry forward their unused Nil Rate and Residence Nil Rate bands.
For everything exceeding your thresholds, how can you reduce your inheritance tax liability?
Engage an expert to draft your will and provide tax planning advice.
A badly drafted will could lead to more tax becoming payable than is necessary. This may not always be obvious to someone who is unfamiliar with legal jargon. For example, the rules relating to the Residence Nil Rate Band are complex and, if the will is not carefully drafted, the tax allowance can be lost. An expert can also advise on available reliefs/exemptions/issues relating to someone’s home.
Make Lifetime gifts and make use of available exemptions.
Exempt gifts are always desirable since the effect is immediate. Exemptions include spouse/civil partnership and charity exemptions (available during lifetime and on death). Lifetime exemptions include the annual exemption of £3,000, and the small gift exemption of £250 per recipient. There is also the “Normal Expenditure Out of Income” exemption, which is useful if you have a high income since there is no upper limit. You can make regular gifts out of income, and provided you are left with sufficient income to maintain your usual standard of living, then the gifts are exempt.
If you make a gift which is not exempt and survive that gift by seven years, then it will not be considered after your death. Taper relief may be available to reduce the tax on larger gifts if you only survive three years. If you reserve a benefit from the gift, then you may still be treated as owning the asset on your death e.g., giving away your house but continuing to live there, without paying a market rent.
You may prefer to make the gift to a trust, particularly where some degree of control is required over the assets e.g., when the beneficiaries are minors. One should be cautious, however, since doing this can attract an immediate charge to inheritance tax at lifetime rates (currently 20%), if the gift exceeds your Nil Rate Band. The charge does not always apply, as is the case for a Disabled Person’s Trust.
Make use of reliefs
If you own an interest in a business or agricultural property, then inheritance tax relief may be available, so suitable advice should be obtained to ensure that you qualify for any reliefs.
Pension planning
Pensions can often pass inheritance tax free to beneficiaries. You should seek advice from a pension specialist.
Beware
Gifting an asset during your lifetime could trigger other tax liabilities, particularly capital gains tax.
There are many ways of seeking to reduce your inheritance tax bill on your death. You should take appropriate steps during your lifetime and seek expert advice. When making gifts, you should always consider your own lifetime needs.