Planning ahead? Be smart about what you leave behind.
When you’re gone, you’ll want all your hard work to fully benefit your family and loved ones. But Inheritance Tax liability can reduce the size of the estate you are able to leave behind. Be smart and plan ahead.
If your estate is worth more than the threshold for Inheritance Tax, there are things you can do to mitigate the tax burden and plan ahead for the future. Read on for a quick guide to Inheritance Tax, the thresholds and what you can do to protect your estate.
What is Inheritance Tax?
Put simply, this is a UK tax on your estate after you have died. Your estate will include any/all property you own, cask assets and personal possessions.
When do you have to pay Inheritance Tax?
Inheritance Tax becomes payable when your estate is worth more than £325,000 for an individual. The threshold is higher for a married couple or couple in a civil partnership with an estate being allowed to be worth up to £650,000 before the tax is applied.
When an estate is worth more than this the Inheritance Tax, currently at 40% will have to be paid on the excess. This is applicable to assets left to beneficiaries who are not exempt like spouses and charities.
Changes in the law have provided a new tax-free allowance of £125,000, which will rise to £175,000 by 2020/21, giving individuals an additional allowance to be used against a property. This is provided their estate doesn’t surpass £2.35 million and it is left to children or grandchildren.
By 2020, this means that when this is added to the existing threshold amount a couple will be able to leave £1 million without paying Inheritance Tax.
As with many legal matters the rules are far from simple and straightforward, so planning ahead throughout your lifetime.
Inheritance Tax and making gifts
Inheritance Tax is calculated by adding all your assets plus the value of any gifts or trusts made during the last seven years of your life, together.
In most cases, if you live past the seven years after making a gift, that gift will no longer be liable for Inheritance Tax. However, if you die during this period the gift will be added to the total value of assets and become subject to Inheritance Tax.
No Inheritance Tax is due on ‘absolute’ or ‘lifetime’ gifts made at any time from your state. These are also known as “potentially exempt transfers.”
For the purposes of inheritance tax, the three most common gifts to consider are:
- Small gifts – gifts that don’t exceed £250.
- Annually exempt gifts – gifts made during a tax year up to the value of £3,000.
- Potentially exempt transfers (PET) – gifts exceeding £3,000 that would exempt you from Inheritance Tax if you survive past seven years of making it.
Obviously, making PET gifts earlier in life will increase the chance of it becoming exempt of Inheritance Tax.
Other gifts that can be made are wedding gifts to children of up to £5,000, up to £2,500 for grandchildren and up to £1,000 for anyone else getting married. These must be made shortly before or on the date of marriage.
Regular gifts can also be made from your surplus income (rather than capital), and there is no limit on gifts that can be made, as long as you don’t have to use capital or living expenses to make the payment.
If you give away assets, rather than money, these gifts might be liable for Capital Gains Tax. “Reservation of benefit” rules may also allow you to give away assets but you still benefit from it and it remains in your estate for Inheritance Tax purposes.
Trusts allow you to make gifts during your lifetime so that recipients can’t access them immediately. You could consider adding money and assets to a Trust for loved-ones to access after your death. There may be tax implications in setting up a Trust so it is worth researching this and seeking advice before going ahead.
When is a good time to look at making gifts?
Producing your accounts at the end of each tax year is a great time to review your estate and take advantage of the annually exempt gift allowance. You can also carry forward allowance from the previous year, which means you can make a gift of up to £9,000 with a potential tax saving of £3,600.
It is also a good time to take stock of your year on year growth in assets, allowing you to plan more effectively for the future. Are you able to make any further PET gifts or set up any trusts that will help you balance your estate assets with a view to reducing Inheritance Tax?
With lifetime inheritance tax planning, you need to carefully consider the wider aspects of making gifts before taking any action. It is worth seeking professional advice to make sure the action you take suits your particular circumstances best.
If you would like to speak to one of our specialist team, 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.