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Inheritance Tax Planning
Inheritance Tax planning can prove invaluable for those wishing to leave behind assets to their loved ones and who do not want more money than necessary to go to the taxman. The JMW team can provide all the advice you need to ensure you make the right decisions and your assets go to who you want them to. We are happy to discuss any aspect of Inheritance Tax planning, making sure you take the right steps based on your specific circumstances.
Inheritance Tax is charged at 40% on the value of your estate when you die. However, there are some very valuable exemptions and reliefs which, when applied to your estate, can dramatically reduce your tax liability.
Some of the most common exemptions and reliefs include:
If you are married or civilly partnered, then anything you give during your lifetime or on death to your spouse or civil partner is free from Inheritance Tax. So long as you both have the same domicile, there is no upper limit to this exemption, so it is probably the most valuable and widely used exemption.
Everyone has a nil-rate band for Inheritance Tax. It works like the income tax allowance we all have, so that tax is only paid on the amount in excess of the allowance. The nil-rate band is currently set at £325,000, so if your estate is worth less than this you will not pay any Inheritance Tax when you die.
Since October 2007, it has been possible for spouses and civil partners to transfer any unused portion of their nil-rate band between them on death. So, if one spouse dies and leaves the whole estate to their surviving spouse, the surviving spouse also inherits an extra nil-rate band.
On the subsequent death of the survivor, they can leave an estate worth up to £650,000 without any Inheritance Tax being due. If you have been widowed and have married again, it may be possible with a professionally drafted will to secure three nil-rate bands, such that you could leave an estate worth up to £975,000 free of Inheritance Tax.
Any gifts you leave to charity, whether during your lifetime or on death, are completely free of Inheritance Tax. There is also an additional Inheritance Tax benefit if you include gifts to charities in your will. If you leave at least 10% of your chargeable assets to charity, then the rate at which Inheritance Tax is charged on your chargeable estate is reduced from 40% to 36%.
There are specific reliefs available for agricultural or business assets that are available at either 50% or 100% of the value of the assets, which could be very valuable reliefs to secure. There are rules surrounding the type of asset, the length of time that you have owned the assets and what the business activity is, which govern whether your estate would qualify for the relief and the rate at which the exemption applies.
These rules are applied on a case-by-case basis, so it is important that if you think you could qualify for these reliefs you speak to an expert who will be able to explain how the rules apply to your estate.
There are two types of exemption for gifts. First, there is no Inheritance Tax to pay on gifts made by a person up to the value of £3,000 in a tax year. Anything above that amount will be added back into your estate if you do not survive seven years after the gift. If no gifts were made, or gifts totalled less than £3,000, the leftover exemption can be carried over into the next year.
Secondly, small gifts up to the value of £250 given to any individual will not be taxed either. This means that if you can, give £250 to as many people as you want in one year and no Inheritance Tax will be payable, even if you do not survive the gifts by seven years.
Gifts during a person’s lifetime on the occasion of a marriage or a civil partnership can also be exempt from Inheritance Tax, as long as they were made on or shortly before the ceremony. The limits are:
- £5,000 by a parent of either of the couple
- £2,000 from either of the couple to each other
- £1,000 in any other case
Gifts can be made to the couple or to anyone else benefitting from the marriage or civil partnership, such as children of the couple.
There will be no Inheritance Tax to pay where gifts have been made during a person's lifetime for the purpose of maintenance of another person, even if you do not survive the gifts by seven years. Broadly speaking, this includes payments made:
- From one partner in a marriage or a civil partnership for the maintenance of the other
- For the education or maintenance of a child (including stepchildren and adopted children)
- For the care or maintenance of a dependent relative who is incapacitated by infirmity or old age
Another perhaps little-known exemption applies to regular transfers made as part of a person's normal expenditure out of their income that do not affect her or his usual standard of living. For example, someone may pay £1,000 per year for a life assurance policy for her son or £10,000 a year for grandchildren's school fees. If her income was sufficient and there was a regular pattern of paying the sums and it did not affect her lifestyle, then the payments would be exempt from Inheritance Tax, even if she died immediately after making a gift.
HMRC considers these exemptions on a case-by-case basis, and you should therefore speak to an expert about whether this could apply to your estate.
If you are thinking about making gifts or setting up a trust, it is vital to consider the tax implications of doing so. Creating a trust or making large gifts during your lifetime for your children or grandchildren can result in a large bill for both Inheritance Tax and Capital Gains Tax.
Profits made on property or investments sold during a person's lifetime can create a Capital Gains Tax liability. The tax can also apply if the property or investments are given away, as the assets are assessed at what their value would have been at the date of the gift if they had been sold instead.
Gifts made during a person's lifetime and distributions out of an estate on death may be subject to Inheritance Tax, as well as Capital Gains Tax.
Whether a Capital Gains or Inheritance Tax liability occurs will depend upon the size of the profit made, or value of both a gift and a person's estate. A gift made without taking advice could result in:
- A tax liability that could have been avoided
- A further tax liability where tax has already been paid during your lifetime
- A gift falling back into your estate and creating a tax liability
Our expert team will provide you with all of the information you need to ensure you make the right decisions that will benefit both you now and your loved ones in the future.
Planning ahead is key to preserving your assets and mitigating tax, and our team can help you by guiding you through the ever-increasing amount of tax legislation and work out the best way forward
We can offer advice in relation to:
- Lifetime trusts
- Lifetime giving
- Charitable gifts
- Charity creation and registration
- Succession planning
- Domicile and residence
We work closely with your accountant or adviser to ensure that you receive the best possible solution for your specific circumstances with the minimum of jargon. Our approachable solicitors have clients nationwide and abroad who appreciate JMW's friendly and practical advice.