At McDade Roberts we help individuals with a full range of tax matters. One tax that can weigh heavily on our clients minds is inheritance tax. Read on for a quick summary of what you need to know when thinking about inheritance tax.
What is Inheritance Tax?
Inheritance tax (IHT) is levied on a person's estate when they die, and certain gifts made during an individual's lifetime.
Gifts between UK-domiciled spouses and registered civil partners during their lifetime or on death are exempt from IHT. Most gifts made more than seven years before death will escape inheritance tax. Therefore, if you plan in advance, gifts can be made tax-free and result in a substantial tax saving. If you are considering minimising the impact of inheritance tax on your estate, why not give us a call to discuss options.
Scope of Inheritance Tax
When a person dies Inheritance tax becomes due on their estate. IHT can also fall due on some lifetime gifts but most are ignored providing the donor survives for seven years after the gift.
The rate of tax on death is 40% and 20% on lifetime transfers where chargeable. For 2023/24 the first £325,000 chargeable to IHT is at 0% and this is known as the nil rate band. The nil rate band has been frozen at £325,000 since 2009 and this will now continue up to 5 April 2028.
Residence Nil Rate Band
An additional nil rate band was introduced for deaths on or after 6 April 2017 where an interest in a qualifying residence passes to direct descendants. The amount of relief was initially phased in but is now £175,000 for 2023/24 and will remain at that level until 5 April 2028. For many married couples and registered civil partnerships, the relief is effectively doubled as each individual has a main nil rate band and each will also potentially benefit from the residence nil rate band.
The residence nil rate band can only be used in respect of one residential property which does not have to be the main family home but must at some point have been a residence of the deceased. Restrictions apply where estates (before reliefs) are in excess of £2 million.
Charitable Giving
A reduced rate of IHT applies where 10% or more of a deceased's net estate (after deducting IHT exemptions, reliefs and the nil rate band) is left to UK charities. In those cases the 40% rate will be reduced to 36%.
IHT on Lifetime Gifts
Lifetime gifts fall into one of three categories:
- A transfer to a company or a trust (except a disabled trust) is immediately chargeable
- Exempt gifts which will be ignored both when they are made and also on the subsequent death of the donor, eg gifts to charity
- Any other transfers will be potentially exempt transfers (PETs) and IHT is only due if the donor dies within seven years of making the gift. An alternative way of looking at this is that they are potentially chargeable until seven years has passed.
Estate Planning
Much estate planning involves making lifetime transfers to utilise exemptions and reliefs or to benefit from a lower rate of tax on lifetime transfers.
However, careful consideration needs to be given to other factors. For example a gift that saves IHT may unnecessarily create a capital gains tax (CGT) liability. Furthermore the prospect of saving IHT should not be allowed to jeopardise the financial security of those involved.
Gifts to Individuals During Their Lifetime
As these gifts are PETs rather than chargeable transfers when made, no tax at all is due if the donor survives for seven years. Even where a death occurs within seven years IHT may be saved as a result of the lifetime gifts because the charge is based on the value at the date of the gift and does not include any growth on value to date of death.
Annual Inheritance Tax Exemption
An amount of £3,000 per annum may be given by an individual without an IHT charge. Any unused annual exemption may be carried forward one year only, for use in the tax year that immediately follows.
Gifts Between Spouses
Gifts between spouses are generally exempt, if both are either UK or non-UK domiciled. It may be desirable to use the spouse exemption to transfer assets to ensure that both spouses can make full use of lifetime exemptions, the nil rate band and PETs. Special rules apply where only one spouse has a UK domicile.
Small Gifts
Gifts to individuals not exceeding £250 in total per tax year per recipient are exempt. The exemption cannot be used to cover part of a larger gift.
Wedding Presents
Gifts in consideration of marriage are exempt up to £5,000 if made by a parent with lower limits for other donors.
Gifts to Charities
Gifts to UK registered charities are exempt provided that the gift becomes the property of the charity or is held for charitable purposes.
Business Property Relief (BPR)
When 'business property' is transferred there is a percentage reduction in the value of the transfer. Often this provides full relief. It is available on worldwide assets. Additionally no CGT will be payable where the asset is included in the estate on death. Call us to determine whether you have qualifying business property.
Agricultural property relief (APR)
Agricultural property relief is similar to BPR in that it reduces the value of the transfer but it may not give full relief on the value. It is available on the transfer of agricultural property so long as various conditions are met. APR currently includes European Economic Area assets but this is set to be restricted to UK assets only from April 2024.
Use of Trusts
Trusts can provide an effective means of transferring assets out of an estate whilst still allowing flexibility in the ultimate destination and/or permitting the donor to retain some control over the assets. Provided that the donor does not obtain any benefit or enjoyment from the trust, the property is removed from the estate.
McDade Roberts can advise you on whether a trust is suitable for your circumstances and the types of trust arrangements available.
Is Your Will Up To Date?
Minimising inheritance tax obligations can only be achieved by careful planning. Pivotal to this planning is an up to date Will to ensure that any reliefs available are efficiently utilised. McDade Roberts offer a full probate service so we can help you with inheritance tax planning, Will writing and helping you or your loved ones manage an estate.
How McDade Roberts Can Help
Whilst some general tips can be made about IHT planning it is always necessary to tailor the strategy to fit your situation. Any plan must take account of your circumstances and aspirations. The need to ensure your financial security (and your family's) cannot be ignored. If you propose to make gifts the interaction of IHT with other taxes needs to be considered carefully.
The scope for substantial savings may be missed unless professional advice is sought as to the appropriate course of action. Why not give us a call and our friendly team can guide you through any questions you may have. Ultimately, planning your estate now gives you peace of mind so why not give us a call today to book a free initial chat.