Beyond the threshold – reducing the inheritance tax bill
The inheritance tax (IHT) ‘nil-rate band’ has been frozen at £325,000 since 2009, and the Government has announced that it will remain at this level until at least April 2018. This is likely to mean that as wealth grows over the coming years, more estates will become liable to pay IHT and those already facing a tax charge could incur a larger bill.
Any proportion of the nil-rate band which is unused at the first death may be added to the nil-rate band on the death of a surviving spouse or civil partner, subject to certain rules. Lifetime gifts and gifts on death to your spouse or civil partner generally continue to be free of IHT.
IHT is charged at 40% on death, although a reduced rate of 36% applies to death estates where 10% or more of the net estate is left to charity. A 20% rate generally applies to lifetime transfers to discretionary trusts.
While reducing the market value of your home or investments simply to lower your IHT bill could be counterproductive, taking certain steps may help you to reduce that final tax bill.
Older people are often faced with a difficult decision when they are left with a large family home to maintain on a reducing income. Down-sizing can mean a move to accommodation more suited to their needs as they head into retirement, with the benefit of lower bills and a capital sum to invest.
Meanwhile, younger family members may need help to progress along the property ladder. Capital released from down-sizing will not only enable parents to aid (and enjoy) their children’s progress, but as long as they survive seven years from the date the gifts are made, there is no IHT to pay. Gifts within seven years of death may be added back into your estate and the overall tax charge calculated accordingly. Some element of discount applies, but this should not be relied upon.
Small yet bountiful
Small gifts can be made free of any IHT liability, including:
Regular gifts from surplus income – this might include life assurance premiums on a policy written into trust for your heirs, so on death the policy pays out free of IHT
Smaller annual gifts – of up to £250 per recipient, and a one-off £3,000 limit per tax year (which can be carried forward to the following year)
Certain gifts in contemplation of marriage.
For those in business, some key IHT reliefs are available, subject to certain conditions. Up to 100% relief may be due, but care must be taken that the business assets all qualify and, in some cases, continue to qualify. Lifetime gifts of business assets (including shares in the family company) should never be overlooked when you consider your own business succession plan.
Please contact us for advice on your succession, retirement and IHT planning strategies.