The UK Government’s levy on estates of the deceased may seem inevitable, but there are ways to reduce or even prevent your loved ones having to pay UK inheritance tax (IHT) on what you leave them.
The sentiment that “in this world nothing can be said to be certain, except death and taxes” is most often attributed to Benjamin Franklin, one of the founding fathers of the United States. His words suggest that inheritance tax (IHT), which is paid by those who inherit your estate upon your death, merits a place on the list of certainties.
Almost two centuries later, in 1986, Roy Jenkins, the Labour MP and former UK Chancellor of the Exchequer, said with tongue in cheek that IHT was “a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue”.
It is possible to prevent leaving your heirs with a huge IHT bill, although to do so requires a comprehensive understanding of the rules surrounding the tax.
IHT is levied at 40 per cent on estates that are worth more than £325,000, which sounds generous until you factor in that the value of any property owned by the deceased is included in that amount. Government statistics for the tax year 2016-17 showed that 4.6% of deaths resulted in an IHT bill, an increase of 0.4 percentage points on the previous year. IHT receipts have been rising since 2009-10, with HMRC receiving £5.4bn during 2018-19, an increase of 3% (£166m) on 2017-18.
There are many ways to reduce your IHT bill or even prevent it being due altogether. Here are some of them.
1. Leave your money to a spouse
IHT is levied at 40%, but the first £325,000 of everyone’s estate is tax-free. Property and assets can pass between spouses and civil partners without incurring a liability (this is not the case when passing assets from a UK domicile to their non-domicile spouse – if this affects you, you should seek advice urgently), and structuring your will so that each of you leaves money to the other can help reduce the liability further.
Careful planning can allow you to pass any unused portion of your allowance to a civil partner or spouse, which may reduce the tax due on their death. Do note, though, that it is only civil partners or legal spouses who count for this.
2. Pass your home to your direct descendants
The residence nil-rate band (RNRB) can be added to your £325,000 exemption if you leave a property you have lived in to a direct descendant, say a child or grandchild. The additional amount available is £175,000, increasing with inflation. If you have downsized or gone into care, you are still able to claim this portion of the exemption if you can leave assets worth the same amount as the former residence to a direct descendant, although there are complex rules around downsizing.
The RNRB tapers down to zero on estates worth more than £2m so it will not be available to many estates.
3. Keep it in the family
Most UK-registered pensions, QROPS and QNUPS are outside your estate for IHT purposes, meaning that passing these to relatives untouched can be very IHT-efficient. There are other tax benefits too, particularly if you die before the age of 75, when your descendants can receive the pension free of UK income tax.
4. Make IHT-free gifts
One way of preventing your beneficiaries having to pay IHT on your estate is to give it away when you are still alive. However, you can’t just assume that anything you give away is automatically free of IHT – the giver must survive for a certain number of years after the gift, otherwise it will be counted as being within the estate. This may be seven or 14 years depending on circumstances. You can also give £3,000 away each year without the gifts being liable for IHT, and this allowance can be carried forward for one calendar year but may not be used in conjunction with larger gifts. There are some extra exemptions for charity gifts, wedding gifts, gifts to help with living costs and ’gifts from surplus income‘. To find out more about these ask your wealth manager.
5. Use a trust structure
Some trust structures, which are used to leave money for the benefit of others, can allow you to leave money to someone else without it being subject to IHT. However, the rules around this are very strict and different trust structures have different rules.
As it is vital that you understand the type of trust you are using and the resultant IHT implications, you should ensure that you talk to a professional.
6. Talk to an expert
As you can see, the rules around IHT are complex and can make a real difference to the legacy you leave. A wealth manager with expertise in this area can help you to make a workable plan. You may also need to amend your will with the rules in mind.
Contact us today for a free financial planning consultation and get all your financial affairs in order.
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