Inheritance Tax Planning
Inheritance tax is the tax levied on your estate when you die and your estate gets passed onto your beneficiaries.
You can work out your inheritance tax from this table:
First £0-£325,000 Nil Rate Band (no inheritance tax)
Over £325,000 40%
Reduced Rate** 36%**
A reduced rate of 36% applies to estates for which 10% or more is given to charity.
Your estate includes:
- All of your property
- Investments & homes (no matter where in the world they are located)
- Business assets such as farms (where you are the owner, occupier, or tenant)
- Unincorporated businesses
- Unlisted or AIM listed companies
Business property relief may apply on a business asset if it has been held for 2 years. Agricultural property relief will also apply.
In general though, if you consider yourself a business person, entrepreneur, or landlord, you should have a full analysis carried out.
However, if you are in business with significant business assets, you may have little current liability. You need to look forward and consider the position when you have retired.
Will you be passing assets on to other people? (so that they no longer belong to you when you die)
Are you more likely to sell them? –if so, then when you die, your estate will be subject to IHT and you should plan for this.
*IHT is levied on the global assets of people who are UK domicile.
Spouses and civil partners
Currently, most transfers of property between spouses or civil partners are exempt from IHT. This means that when one partner dies and leaves some or all of their property to their spouse/civil partner, they may not make full use of their own £325,000 nil-rate band.
However, it is possible to transfer unused nil-rate band allowances between spouses or civil partners. The rules apply to allow a claim to be made to transfer any unused IHT nil-rate band on a person’s death from the estate of their deceased spouse/civil partner.
The amount of the nil rate-band potentially available for transfer will be based on the proportion of the nil-rate band unused when the first spouse or civil partner died. If on the first death the chargeable estate is £150,000 and the nil-rate band was £300,000, then 50% of the original nil-rate band is unused. If the nil rate band when the surviving spouse dies is £325,000, then that would be increased by 50% to £487,500.
Any claims for transfer of unused nil-rate band amounts can be made by the personal representatives of the estate of the second spouse or civil partner to die when they make an IHT return. The rules apply to all surviving spouse/civil partner estates, including those when the death of the first spouse/civil partner occurred prior to that date.
First Death before 18th March 1986
If the first death happened this far back, seek advice as tax rules were different then and the availability of any NRB will depend on the details of the tax treatment of the estate at that time.
Tax Mitigation (that doesn’t work)
The most common inheritance tax mitigation is giving something to someone but really keeping it until you die e.g. giving your house to your children whilst still living in it until you die. This falls under the ‘gift with reservation’ rule meaning that this ‘gift,’ is not a gift until the donee benefits from it.
However, there may be capital gains tax implications
Advice and planning is essential
These need to be looked into with great detail. The practical approach will be some or all of:
- You can give away as much as you like to whomever you choose. If you live 7 years after the last major gift, there will be no inheritance tax upon any of the gifts.
- Providing for the anticipated tax liability by means of life insurance. The liability is estimated (net of any will and gift-based planning) and a life insurance policy is taken out that pays out the amount needed for tax. This is paid into a trust and so falls outside the estate. This is most widely used where the estate comprises large assets whose sale or breakup is to be avoided so that they can be passed intact down the generations (typically a family property, art, antiques etc.)
If you have an estate for which inheritance tax may be an issue, it is important to seek advise and plan in advance. We will be able to assist you in this.
This information is based on our understanding of current tax law and practice, which may change in the future. The way in which tax charges, reliefs and allowances are applied depends upon individual circumstances and may also be subject to change in the future. This document is solely for information purposes and nothing in this document is intended to constitute tax advice. You should take professional advice before making any tax planning decisions.
The FCA does not regulate certain tax planning activities and services, will writing or advice on charitable giving. Not all inheritance tax solutions are authorised and regulated by the Financial Conduct Authority (FCA).