Things to consider for annual and longer-term inheritance tax planning
Over the last few years, the tax receipts from inheritance tax (IHT) have been steadily rising. This is in part due to increasing property prices and wealth while the nil rate band (the threshold at which you start to pay IHT) is frozen at £325,000. The other reason is that many of the reliefs and exemptions available are often not utilised.
The right planning for many individuals can take them out of the IHT net completely and for others, there are significant savings going unused.
There are a number of reliefs and exemptions for IHT, some common ones to consider annually are:
- Annual Exemption – An amount of up to £3,000 can be given away each tax year and, if unused in a year, that amount can be carried forward for one year and utilised in the following tax year
- Small Gifts Exemption – You can give up to £250 to as many people as you wish each tax year.
- Gifts out of Income – If your income regularly exceeds your expenditure, you can give away the excess. To qualify, the gifts must be part of a settled pattern of giving or there must be evidence of the intention of this. You should also be able to demonstrate that the gifts come from excess post-tax income either because you can show they do not deplete your capital or by showing the annual income and expenditure
Considering the above gifts should become part of your annual tax planning although also important to make sure you are leaving yourself sufficient income for your needs.
In addition to considering utilising gifts on an annual basis, you should also take a look at your overall position every few years.
The questions to be asking are:
- are your assets structured to make the best use of the allowances?
- have you passed on assets that you no longer require to the next generation or even skipping a generation?
- are your assets functioning to provide you with enough income if you are retired or will they when you retire?
If the answer to any of the questions above is no, now is the time to be looking at your IHT position.
You could consider some of the following planning actions:
- Potentially exempt transfers (PETS) – a gift to an individual (family or others) that is in excess of the annual or small gifts exemption. There is no immediate charge to tax and if the donor lives for 7 years from the date of the gift, it is exempt from IHT. There is a tapering of the relief after 3 years that increases up to the 7 years.
- Chargeable lifetime transfers (CLT) – this is usually on a gift to a trust. Lifetime IHT is charged at 20% on the excess over the nil rate band of £325,000
- In addition to the nil-rate band that can be used in lifetime and on death, there is a residential nil rate band available only on death. This is a valuable relief but restricted on estates over £2million. Where appropriate, restructuring between spouses or civil partners to ensure both are below the £2 million means the relief is available on first death and further planning before the second can mean both bands can be utilised.
- Trusts – while trusts have dropped in popularity in recent years, they are still a very useful tool in estate planning as it allows a degree of control over the assets after they have been given away. You cannot benefit from them, but you can have control over what happens to them which can be particularly useful where minor children are involved or for older children where divorce is a concern.
- Family investment companies – these are becoming more popular and are often being considered in place of trusts although both can be used together
- Business relief and agricultural property relief – these are complex but can provide very significant relief from IHT so it is important to take advice and ensure you are eligible and that you can evidence this should it be needed.
- IHT efficient investments – there are many of these available, many of which utilise Business relief and agricultural property relief. Appropriate investment advice would be needed when considering such planning, as the commercial risk needs to be considered as well as the tax benefits.
This is a brief summary of some of the most common reliefs and planning options for IHT. When planning for IHT it can also have an effect on both income tax and capital gains tax. It is therefore important to take advice so that it is all done correctly. Planning should be tailored to you and your family ensuring you have sufficient funds in lifetime as well as being tax-efficient for the next generations.