Mitigating Inheritance tax (IHT)
Inheritance Tax can not only mean a reduction in the value you pass on, but also a liability for your beneficiaries to pay as well at a time of grief. The best way to mitigate the impact is to think ahead, understand your exposure and ensure their are plans in place to take care of the tax liability.
Inheritance Tax allowances
Nil-Rate Band
The Nil Rate Band is the threshold up to which an individual's estate is exempt from inheritance tax - the standard nil-rate band is £325,000. This means that estates valued below this threshold are not subject to inheritance tax. However, any amount exceeding the nil-rate band may be subject to the 40% tax rate.
Residence Nil-Rate Band
The Residence Nil Rate Band (RNRB) is an additional allowance introduced to reduce inheritance tax liabilities on the value of a person's home when passed on to direct descendants. It currently stands at £175,000 per person. This allowance is in addition to the standard nil-rate band and applies when a qualifying residential property is included in the estate and is left to children or grandchildren. The RNRB, however, is tapered away by £1 for every £2 the estate exceeds £2 million.
Gifts to charity
If you leave a gift to a registered charity within your Will, there will be no Inheritance Tax charged on this amount. Furthermore, if you gift more than 10% of your estate to registered charities, there is a reduction in the rate of Inheritance Tax on the balance of your estate from 40% to 36%.
Gifting money away
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Regular gifts, made out of income, that do not reduce your standard of living, may be considered Inheritance Tax exempt immediately.
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Gifting from capital, if it exceeds the annual exemption (which is currently £3,000) would be known as a Potentially Exempt Transfer (PET) which means you must survive 7 years for the value to fall outside of your estate for IHT purposes. If you die within 7 years, your estate will typically tax IHT on the gift.
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Donating to a registered charity will be IHT exempt immediately, usually.
The use of Trusts
Trusts can provide an opportunity to gift money from your estate, without the ultimate beneficiary receiving the funds immediately. This may be useful if you wish to gift money away to children under the age of 18, or if you are not fully decided on whom, how much or when you would like the beneficiaries to receive distributions. Many different Trusts exist, and each has differing tax treatments; however they can prove useful in mitigating IHT liabilities, as well as ensuring your beneficiaries inherit assets as and when you wish.
Knowing where everything is
Knowing where all your financial and important information is will help your beneficiaries hugely, and will also enable you to better keep track of your assets and see room for simplification. Whatever your chosen medium to holding this information, it’s useful to let your beneficiaries or executors know where to find it. If you are unsure where to start, feel free to download and use our ‘What I own and where I keep it’ document by clicking the button below.
How we can help
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An in-depth calculation of your assets, their IHT treatment with an estimate of the estate’s current liability.
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We can provide bespoke recommendations which will assist in reducing the amount of IHT payable by your estate. These options include ensuring allowances are used, gifting capital, the use of Trusts as well as other options such as Business Relief (BR) qualifying investments.
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We can produce cashflow forecasts based upon agreed assumptions of how much money you will need in later life, taking into account care costs, house prices and other income. This can then form the basis for a discussion of how much you can afford to gift, without impacting your standard of living in the future.
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We can continue to update your IHT liability as plans come to fruition, as well as managing affairs set up to mitigate IHT including Trusts and Business Relief (BR) qualifying investments. We can also assist the beneficiaries at the point that assets are passed on, helping them navigate this difficult time.
