The issue of inheritance tax planning will always be controversial. This is largely because it’s a secondary tax on accumulated wealth that has already been subject to tax, or even an inheritance that has already been subject to IHT.
It is also part of a complex landscape where the rules surrounding the tax are daunting and change regularly. It is a tax that most people put off addressing, mainly because it doesn’t impact your finances within your lifetime. As it’s such a controversial topic, it often attracts a lot of political attention – during the run up to the 2015 general election, members of both major parties attacked solutions such as these simple and legitimate ways of inheritance tax planning:
Deed of variations – this instrument allows beneficiaries of a deceased’s estate to alter the distribution of that estate by altering the deceased’s will. The effect of this is that the original beneficiary can redirect the legacy or entitlement to a third party, without it being counted as a gift from the original recipient. An example might be an older beneficiary varying the will in favour of grandchildren if he or she is not in need of money. The advantage is it will not form part of the intended recipient estate and be taxed again when they eventually die.
Outright lifetime gifts – there are a series of gift allowances, which will escape IT if you survive seven years from the date of the gift:
- A husband or wife, or civil partners, can give gifts of any value to each other during their lifetime, as long as you’re both domiciled in the UK.
- You can make any number of gifts of £250 or less each year. These gifts are meant to cover things such as birthday and Christmas presents. However, you can’t combine this with the £3,000 limit if you’re making a larger gift to the same person.
- You can make gifts to other people, of up to £3000 each year, although you can’t combine this exemption with the £250 gift allowance. You can carry forward any unused allowance to the next year – but only once. This is known as the ‘annual gift exemption’.
- You can make gifts to people and certain trusts more than seven years before your death; these are known as ‘potentially exempt transfers’.
- You can make gifts as part of your normal expenditure – this exemption allows you to give away money from surplus income, providing the gift doesn’t reduce your standard of living, is not from capital and forms some pattern of regular spending. A good test is if the money comes from your current account.
- You can make gifts to people getting married: up to £5,000 from each parent of the couple, £2,500 from each grandparent or more remote relative, £2,500 from bridegroom to bride (and vice versa) or between civil partners and £1,000 from anyone else.
Inheritance tax planning: what’s the new residence nil-rate band?
The biggest change to affect the inheritance tax landscape is the ‘main residence allowance’ or ‘inheritance tax threshold’ which will, in time, add £175,000 to the inheritance tax nil-rate band.
George Osborne introduced the transferable residence nil-rate band in order to mitigate the effect of rising house prices on IHT in the 2015 summer budget. This is an additional allowance to the ordinary nil-rate band and applies when a parent leaves their main residence to their children or grandchildren when they die.
The individual allowance will initially be £100,000, and it’s set to increase to £175,000 by April 2020. As with the usual IHT allowance, it’s also transferrable to a surviving spouse or civil partner. For example, if one partner dies, their IHT allowance could be £325,000 plus £100,000 for their main residence i.e. £425,000, rising to £500,000 by 2020. On the death of the second partner, the couple’s combined allowance could potentially reach up to £1m of allowances before IHT becomes payable, although only £350,000 can be set against the main residence. This new allowance is reduced for estates worth more than £2m.
The residence nil rate band can only be offset against your primary residence, so your primary residence must be worth the equivalent of your available residence nil-rate band in order to make use of the full exemption. Alternatively, if you have downsized your home since April 6 2015 and your current property is worth less than your available residence nil rate band, you can utilise the equivalent of the sale value of your former property. It is estimated that the percentage of estates subject to inheritance tax in 2017/18 will fall by a third as a result.
Watch this video, in which our Head of Wealth Planning explains some inheritance planning top tips:
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The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific person or entity.
The tax treatment of all investments depends upon individual circumstances and the levels and basis of taxation may change in the future. Investors should discuss their financial arrangements with their own tax adviser before investing.
The current inheritance tax rules and tax treatment of AIM shares may change in the future. We strongly recommend that clients discuss their financial arrangements with their tax adviser before investing, as the value of any tax reliefs available is subject to individual circumstances