Tony Granger looks at some useful inheritance tax savings possibilities.
Always an emotive subject, inheritance tax (IHT) is falling more and more on the middle classes than the rich. Your biggest asset is usually your home, paid for from after-tax monies, which means you may effectively be taxed twice on the same money; once when you earn it, and secondly on death. IHT, after exemptions and allowances, is paid at the tax rate of 40% on death, and 20% on certain chargeable lifetime transfers. The yield from IHT has been rising:
2013-14 - £3.4 billion;
2014-15 - £3.6 billion; and
2015-16 - £4.736 billion (a record high).
(HMRC Statistics released 29 July 2016).
IHT receipts have increased year-on-year since 2009-10, on average by 12% each year. This is primarily because of rising asset values. Each year, residential property makes up approximately a third of the total value of taxpaying estates, and the ongoing rise in property prices has contributed to a rise in overall tax take. The IHT threshold (or nil rate band) has been frozen at £325,000 since April 2009. Properties, household savings and securities make up the bulk of most taxpaying estates. 3.5 per cent of deaths were liable for IHT in 2015-16.
It is important to make use of all available exemptions and allowances, the most common being detailed below. Proper planning is essential.
Nil rate band
As mentioned, the IHT threshold (or nil rate band), has been frozen at £325,000 since April 2009. Each individual’s estate gets this, and married couples (and civil partners) can generally transfer their unused allowance to the surviving spouse.
A new residence nil rate band (RNB) will come into effect at £100,000 per person from 6 April 2017, increasing by £25,000 a year until it reaches £175,000 in 2020-21. The RNB applies broadly if your home passes to direct descendants. Effectively, by 2020-21 each estate will potentially have a nil rate band of £500,000 (i.e. the standard and residence nil rate band), if they qualify.
Spouse exemption
Leaving assets to a spouse is the most popular exemption. There is no such exemption for unmarried partners.
Tip:
Consider making use of the nil rate band of £325,000 by (say) gifting assets to children, before using the spouse exemption.
Gifting to charity
Leaving at least 10% of your net estate (i.e. after deductions for liabilities, reliefs and exemptions other than the charity exemption) to qualifying charities can reduce the IHT from 40% to 36%. Around 8% of estates use this exemption annually.
Gifts to charity generally reduce your estate, but at least 10% gifted can secure the lower tax rate.
Business property relief and agricultural property relief
Qualifying business or agricultural property and shares passing can have up to 100% IHT relief, if certain conditions are satisfied.
Tip:
If company shares are sold before death, there is no BPR available, so use a ‘double option agreement’ where sale after death is a possibility.
Life assurance proceeds
Make sure your life policies are written in trust, such that the proceeds will not form part of your estate.
Other exemptions
Other exemptions include the gift annual exemption of £3,000 per annum; small gifts exemption of £250 per recipient; gifts in contemplation of marriage (within certain limits); and payments which are ‘normal expenditure out of income’.
Potentially exempt transfers
Gifts to an individual (but not usually a trust) will normally be out of your estate for IHT if you survive for seven years.
Investments that reduce taxable estates
Enterprise investment scheme and seed enterprise investment scheme investments if held for two years are potentially 100% IHT free. Discounted gift trusts generally have a portion immediately out of your estate, the balance is normally exempted after seven years. Most other investments, including ISAs, are generally subject to IHT.
Practical Tip:
Consider an IHT savings plan now to potentially save thousands later, and seek suitable professional advice, particularly in respect of investments.
