Planning to minimise Inheritance Tax (IHT) is something that many of us put off until it is too late. IHT is charged on a person’s estate when they die and on certain gifts made during their lifetime. The rate of tax on death is 40%.
The threshold for IHT (also called the nil rate band) is currently frozen at £325,000 until 6 April 2021. This means that many estates will fall within the charge to IHT. There is, however, some good news on the horizon. A new IHT Residence Nil Rate Band (RNRB), effective from April 2017, means that there is now an additional inheritance tax nil-rate band available in respect of homes, if passed on death to a direct descendant (including a step-child, adopted child or foster child) of the deceased and their lineal descendants.
It is being phased in over 4 years and the full £175,000 allowance will not be available until April 2020. The RNRB will start at £100,000 in 2017/18 and will increase by £25,000 each tax year until 2020/21. By 2020/21 families could escape IHT on up to £1M of their wealth as each parent will have a nil-rate band of £325,000 plus a RNRB of up to £175,000.
There are steps you can take now to minimise IHT. Regularly using IHT exemptions will build up funds outside of the estate without incurring an IHT liability. Spouses/civil partners can each take advantage of the exemptions, the main ones being:
- an annual gift allowance of £3,000 per donor per year (this can be carried forward for one year, if unused)
- small gifts not exceeding £250 in total per donee per tax year
- gifts made out of surplus income that are typical and regular
- gifts made in consideration of marriage up to £5,000 if made by a parent, £2,500 by grandparents and £1,000 by other
- gifts to charities whether made during lifetime or on death
- gifts between spouses and registered civil partners, whether made during lifetime or on death.
Many lifetime gifts are treated as ‘potentially exempt transfers’ (PETs). As long as the donor lives for at least seven years after making the PET there will be no possibility of an IHT charge whatever the size of the gift. .
Trusts can still provide an effective means of removing assets from an estate and allow flexibility in their ultimate destination and the donor to retain some control.
Finally, it is important to keep your Will up-to-date to reflect changes in the family situation. In particular, Wills need to be reviewed and amended as necessary on marriage or on divorce. Even if your assets are worth less than the IHT threshold you should consider making a Will so that you choose who gets your assets after your death. If you die without a Will, the intestacy provisions will apply and may result in your estate being distributed in a way you would not have chosen.
If you would like more information on inheritance tax planning, please contact moorestephens south at marketingsouth@moorestephens.com