Are You Facing an Inheritance Tax Bill You Didn’t Plan For?

No one wants to pay inheritance tax (IHT) unnecessarily. However, navigating your way through the complicated rules on your own is not likely to help.

According to recent reports in the press, hundreds of families may be left with an unexpected inheritance tax bill to pay as a result of misinterpreting these rules. Especially the regulations relating to gifts and property.

Inheritance tax review

It seems that Chancellor Philip Hammond shares the view that George Osborne’s nil rate band regulations have created more problems than they have solved. In his recent letter to the Office for Tax Simplification’, the Chancellor has requested an urgent review of the current ‘complex’ IHT rules.

His letter specifically mentions “how current gift rules interact with the wider IHT system”. This follows hot on the heels of recent reports that an additional £900 million in IHT receipts will be collected in the next 4 years. Furthermore, according to the Office for Budget Responsibility’s December forecasts, this figure has been adjusted upward by almost £1 billion.

So, in the context of IHT planning, the Chancellor’s recent intervention is well timed.

Present IHT rules

Under the present rules, you are not usually liable to pay IHT if either:

the value of your estate is below the £325,000 threshold (Nil Rate Band); or
you leave everything to your spouse or civil partner, a charity or a community amateur sports club.

Gifting – cash

As far as cash gifts are concerned, in addition to the standard allowances, there are certain exemptions an individual can make use of when making a gift during their lifetime. The current yearly allowance is £3000. This is set at £6000 if you didn’t make a gift in the previous year. Other exemptions include:

small gifts of up to £250 per recipient;
up to £5000 as a wedding gift;
regular gifts of surplus income in certain circumstances.

Gifting – property and high value assets

The Residence Nil Rate Band (RNRB) was introduced in April last year. This increased the tax-free total by a further £100,000. However, the rules surrounding this relief have made things much more complicated, causing many to fall foul of this provision. There are several other requirements to be aware of, but the following are key:

RNRB can only be used by individuals leaving residential property to their “direct descendants” (e.g. children, grandchildren etc);
The recipient of the gift must enjoy possession of the gift;
Individuals who give their property to their adult children during their lifetime and continue to live there are not necessarily exempt from IHT. Whilst these gifts, known as “gifts with reservation”, can be effective as a means of minimising IHT liabilities, they must be absolute;
In most cases, if you survive for seven years after a gift has been made, property and other high value assets are exempt from IHT.

Gifts with reservation – beware there are strings attached

If you continue to live in your house after you have given it away, you will need to pay for the benefit. Otherwise, your beneficiaries will be liable to pay tax on the gift (at a rate of 40%);
If you pay rent, the amount must be at the true market rate, regularly reviewed and subject to a lease or tenancy agreement;
Where a gift of land is made, you must not occupy the land (for example because the land is rented out).

Our advice

Make sure you are up-to-date with current IHT rules. Navigating them correctly will prevent your family from paying more tax than they need. In most cases seeking professional advice early makes sense and will often save you money.

If you’d like to discuss this or any other aspect of estate planning, please contact us. We’re here to help.

Please note that all views, comments or opinions expressed are for information only and do not constitute and should not be interpreted as being comprehensive or as giving legal advice. No one should seek to rely or act upon, or refrain from acting upon, the views, comments or opinions expressed herein without first obtaining specialist, professional or independent advice. While every effort has been made to ensure accuracy, Curtis Parkinson cannot be held liable for any errors, omissions or inaccuracies.