Helen Hill LL.B (Hons.) FCILEx TEP
Licensed Conveyancer and Probate Practitioner | Commissioner for Oaths | Chartered Legal Executive
Inheritance Tax, otherwise commonly referred to as IHT, is a tax levied against your estate following your death. Recent government statistics show that IHT receipts by HMRC were almost £4.7 billion in 2015-16. This was an increase of 22% on the previous year. That’s £4.7 billion that went to the tax man last year alone!
The Planning Crowd Limited specialise in end of life planning and often demonstrate how planning ahead can save people time, heartache and of course….. Money.
There is no magic formula that can make IHT disappear, but understanding and acknowledging that a problem or liability exists is the first step towards addressing it.
IHT is a one-off tax that is paid on the value of an estate. An individual has what is known as a “Nil Rate Band” (NRB). This NRB is the value you can leave as an inheritance before IHT becomes payable. The current NRB is £325,000. IHT is calculated as 40% of anything over and above the value of the NRB. So, as a quick example, if an individual died leaving a £500,000 estate the following calculation would be made to establish how much IHT was payable:
(£500,000 - £325,000) x 40% = £70,000
IHT can be mitigated in a number of ways if the right planning is put in place. As with any tax payable under the UK tax system, it can be complicated and difficult to understand; but The Planning Crowd can offer simple to understand assistance and advise on:
Transferable Nil Rate Band
Married couples who leave their estates to each other following first death are exempt from IHT. As such, the unused NRB can be transferred to the surviving spouse, meaning that on second death there is a combined NRB of £650,000 before IHT is due.
The recently introduced Residential Nil Rate Band (RNRB)
Those who own a residential property can benefit from an additional NRB amount. This RNRB is limited to one qualifying residence and is currently being phased in, with up to an additional £100,000 available in 2017/18 rising to £175,000 by 2020/21. This means that by 2021 an individual could leave up to £500,000 following their death without incurring IHT. One qualifying provision, however, is that the qualifying property must pass immediately to direct descendants following death. Also note that the level of RNRB available is reduced where the net value of an estate exceeds £2,000,000.
Potentially Exempt Transfers
Gifts can be made from your estate during your lifetime. If you survive for seven years or more after you have made the gift, the value of that gift is excluded from your estate on your death. If you die within seven years, the gift will still be taxed as if formed part of your estate, but at a potentially lower rate according to what’s known as ‘taper relief’. This is determined by how much time elapsed between making the gift and passing away – no reduction is available in the first three years.
Business Property Relief
In some instances business assets can qualify for tax relief following your death. HMRC determine the criteria of what does and does not qualify; but does mean that IHT can be reduced by 50% and in some cases 100%.
Agricultural Property Relief
Where you own agricultural property, it is possible, subject to HMRC criteria, that you may be able to pass it on free of IHT.
Gifts to charities can be made without paying IHT and can potentially reduce the rate of IHT payable on your taxable estate. For example, if you left 10% of your estate to a charity, but IHT was still payable on the remainder of your estate, this would effectively make your IHT rate 36% and not 40%.
This is not meant to be an exhaustive list; and indeed, there are many other types of gifts that can be made during your lifetime that are free of IHT; such as an Annual Exemption that allows you to give away up to £3,000 every tax year without incurring IHT. The use of certain types of trust can also be extremely beneficial; but the important thing is to understand your position and then discover what options you have and what action you might take.
Wills, Trusts and Estate Planning - The Planning Crowd Limited have specialist advisors that can assist you and provide the appropriate advice to help you make a fully informed decision that best suits your own personal situation and goals