Inheritance tax advice
Everyone knows that it is necessary to pay inheritance tax when you die, but not everyone knows that there are ways to mitigate how much UK inheritance tax you have to pay. Getting inheritance tax advice does not have to be difficult or daunting. Mary Ashley is able to help with any enquiries from what may seem mundane to the incredibly complex.
How much inheritance tax you have to pay is based on some relatively simple rules with some complex reliefs provided through (for example, business property relief).
Whilst most people associate an inheritance tax bill with death, some lifetime gifts may be subject to inheritance tax. For this reason it is important to know your tax free allowance and how inheritance tax works so you do not inadvertently find that you are paying unexpected or unnecessary inheritance tax.
If you require specialist advice on inheritance tax, you can contact Mary Ashley.
This page may assist you in determining whether or not you think you could benefit from inheritance tax advice.
Value of Your Estate
One of the key factors in establishing whether you could benefit from inheritance tax advice is by determining the value of your estate. If your estate is below the nil rate band then inheritance tax planning will not really make a difference as your estate would not be subject to inheritance tax in any event.
An individual on their own is entitled to a nil rate band which is currently 325,000. In addition, there is a relief provided for the family home. Provided they have a residential home in their estate in which they live that they are planning on leaving to direct descendants, then they also are able to claim the residence nil rate band which will be valued at 175,000. This means that the total tax free allowance that many individuals will find they are entitled to is 500,000.
An additional allowance can be claimed by married couples or civil partners when the second civil partner or spouse dies. Provided that the first spouse did not utilise their nil rate bands when they died because, for example, they left everything to their spouse and as such the entire taxable estate was exempt, then it is possible for the surviving spouse to claim both the nil rate band and the resident nil rate band. This means effectively that married couples have a 1m tax free allowance for inheritance tax.
When it comes to planning, therefore, a lot of individuals will not need estate planning advice because their estate will be within these nil rate bands.
There are two caveats to this:
- The residence nil rate band will taper if an individual has a high value estate (in excess of 2m).
- Certain conditions must be met in order for the residence nil rate band to be claimed.
There are numerous types of gifts that can be made and whether there is tax to pay depends broadly upon the value of the gift and to whom it is made.
The most common example will be outright gifts from an individual to another. These will be potentially exempt transfers (“PETs“) or subject to what some call the “seven year rule”. This means that provided you survive seven years from the date of making the gift, it will not form part of your estate on death.
If you do not survive seven years, then instead there is a tapering.
There are some further outright exemptions for gifts made during an individual’s lifetime. The most common examples are as follows:
Transfers between spouses or individuals in a civil partnership are exempt (section 18 IHTA);
There is an annual exemption of 3,000/ year (with the possibility to carry forward the unused allowance for one year) (section 19 IHTA);
There is the small gifts exemption for gifts up to 250 given to one person (section 20 IHTA);
Normal expenditure out of income exception – this applies where someone has a regular income which provides enough income that they can make a regular gift of a specified amount free of tax.
Wedding gifts (or gifts in consideration of civil partnership) of up to 5,000, 2,500 or 1,000 depending on the relationship to the person getting married.
Gifts to charities and political parties are also exempt. Care should be taken to ensure that the specific charities or political parties are exempt.
Pensions or Employee Trusts
Outside of the more conventional exemptions, there are other types of assets that may be excluded from your inheritance tax estate. These can include certain employee trusts and pensions. It is worth taking advice if you are unsure whether the particular retirement arrangement you have may be exempted.
Taxation of Trusts
A complicated area for inheritance tax is the taxation of trusts. There are different types of trusts and they are subject to different regimes.
Broadly speaking, there are two regimes for taxing trusts: the relevant property regime, and the qualifying interests in possession regime. Both regimes aim to ensure that the property held in trust is taxed at 40% every generation.
Most trusts formed after March 2006 will be relevant property trusts. This means that to the extent that transfers into the trust exceed the nil rate band there will be an entry charge of 20%. There are charges of up to 6% on the property held every 10 years. There are also exit charges when property leaves the trust of up to 6%. When the person who set up the trust dies, however, the assets in the trust are not treated as theirs.
The qualifying interest in possession regime does not subject to assets to the charges under the relevant property regime, but the property is treated as belonging to the person with the interest in possession for inheritance tax purposes on their death so it will be subject to 40% tax when they die.
Excluded Property Trusts
A subset of relevant property trusts are “excluded property trusts”. These are very helpful devices for inheritance tax planning where the individual is not domiciled or deemed domiciled in the UK when setting up the trust and has assets outside of the UK. They are able to set up a trust which is not subject to inheritance tax and the trustees can transfer assets to the beneficiaries tax free.
It is important to take advice on your current domicile status prior to setting up an excluded property trust because if there is a risk that you are in fact UK domiciled, then it will not be beneficial from an inheritance tax perspective.
If you are currently not UK domiciled but will be in the future, then it is worth considering setting up an excluded property trust as once you are UK domiciled, you are subject to inheritance tax on your worldwide assets.
Mary has regularly advised clients on both their domicile and setting up excluded property trusts. Contact her for more information.
Business Property Relief (BPR)
Outside of the above, there are other key reliefs to bear in mind. The first of these is BPR. This is available on assets which are held for the purpose of a business or which are business assets.
it is worth taking legal advice if you are currently operating a business to establish to what extent the assets may qualify for BPR and if they do not, what steps can be taken to ensure that they do in fact qualify.
Inheritance planning is important and qualifying for a tax relief, such as BPR, can make a huge different to the amount of inheritance tax payable.
Agricultural Property Relief (APR)
There is also APR for individuals who own farms. This can lead to significant savings, but whether or not it applies depends on the individual circumstances and as such, if you own a farm and consider it may apply, it is certainly worth considering taking advice.
In addition to decisions that can be taken during an individual’s lifetime, their family can also consider steps that they may be able to take posthumously in order to reduce the inheritance tax payable.
Often time it is necessary to vary an estate because the deceased did not leave their assets to their spouse or civil partner and as such it was not possible to take advantage of that exemption.
Alternatively, a will was drafted prior to the introduction of the residence nil rate band and as such the conditions for it to apply are not met. Not wanting to lose the tax free allowances, a person’s estate can be varied so as to ensure that the required conditions are met.
Other Complicated Matters
What about a Life Insurance Policy?
Individuals will want to ensure that their life insurance policy is not going to be subject to a 40% inheritance tax charge. This can be dealt with with proper planning, but care must be taken to ensure that no accidental inheritance tax charges are incurred.
Oftentimes the best way to plan is to put the life insurance policy in trust.
Who pays inheritance tax?
The primary person who will be responsible for paying the inheritance tax due on your death estate will be your personal representatives.
If a PET (as discussed above) becomes chargeable, then the person responsible for that inheritance tax will be the person who has the asset.
If assets are held in trust then the trustees will be primarily responsible for both filing and paying inheritance tax as it becomes due. If they do not pay it, however, there is a secondary liability for the inheritance tax on the beneficiary of the asset.