McDade Roberts offer a complete financial service including support to grow your business, manage your personal wealth and then help pass it on to loved ones in the future. Planning to minimise the liability to inheritance tax (IHT) is a team effort involving you and your professional adviser. Below we touch on what you need to consider.
When should I plan for IHT?
Now! IHT is currently payable where a person's wealth is in excess of £325,000 (2018-19). Thus, if you own your own house and have some savings, life assurance policies, or business assets, your estate could be liable. Most gifts made during your lifetime will be entirely exempt from IHT if you live for seven years after making the gift.
How does IHT work?
When you die, IHT will be charged on your personal wealth, together with all or a proportion of your lifetime gifts made in the preceding seven years. The full rate of tax is 40%, but this is reduced on a sliding scale for gifts made between three and seven years before your death.
What do I need to consider?
- The value of your assets now, and how this may change as time goes by
- Your own financial security
- Your family's future needs
IHT: main residence nil-rate band
A transferable nil-rate band has been introduced in order to take the family home out of IHT for all but the wealthiest. This will apply when a main residence is passed on death to one or more descendants (including a child, stepchild, adopted child or foster child) of the deceased and their descendants.
The allowance takes effect for relevant transfers on death on or after 6 April 2017. It has been set at £125,000 for 2018-19, rising by £25,000 annual increments so that it reaches up to £175,000 for 2020-21.
What can I do to reduce the IHT bill?
- Transfers of assets between spouses and civil partners are exempt from IHT, but other lifetime gifts may be more tax-efficient.
- Lifetime gifts are potentially exempt from IHT, and there is no limit on such transfers, so this is an excellent way of transferring assets that you do not need to keep in your estate. It may be advisable to cover substantial gifts by insurance against death within seven years.
- Trusts let you transfer assets out of your estate for IHT purposes, but enable trustees to exercise some degree of control over the capital or income (and you can be a trustee). There may be an IHT charge, but this would be at 20%, and then only if the transfer is over £325,000 (2018-19).
- Life assurance policies (unless designed to cover IHT liabilities) should be assigned during your lifetime so that the proceeds do not form part of your estate on death. The most common assignees are spouses, family members, and trusts.
- A reduced rate of 36% applies to death estates where 10% or more of the net estate is left to charity.
Concession for couples
The IHT standard threshold of £325,000 (2018-19) defines the upper limit of what is commonly known as the IHT nil-rate band.
There is a concession for married couples and civil partners. With effect from second deaths on or after 9 October 2007 the unused percentage of the nil-rate band from the first death estate can be carried forward and added to the nil-rate band available to the second. This combined threshold for couples is therefore set at a maximum of £650,000 for 2018-19.
What to do next?
What you do is your decision, but the sooner you enlist the help of professional advisers such as McDade Roberts, the better. Remember, successful IHT planning has to be a team effort so contact us today.