Planning ahead? Be smart about what you leave behind.

1 September, 2021 4 minutes reading time

After you’re gone, you’ll want all your hard work to benefit your family and loved ones. However, inheritance tax can reduce the size of the estate you can leave behind. Be smart and plan ahead.

If your estate is worth more than the threshold for Inheritance Tax (IHT), there are things you can do to mitigate the tax burden and plan 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?

IHT is a UK tax on your estate after death. Your estate includes all your property, cash, and personal belongings.

When do you have to pay Inheritance Tax?

Inheritance Tax (IHT) is payable on estates worth over £325,000 for individuals or £650,000 for married couples/civil partners. Any amount above these thresholds is taxed at 40% unless the assets are left to exempt beneficiaries like spouses or charities. A new tax-free allowance, called the Residence Nil Rate Band, is available for property passed to children or grandchildren. It’s currently £125,000 and will rise to £175,000 by 2020/21, provided the total estate value is under £2.35 million. By 2020, this could mean a couple can pass on £1 million IHT-free (combining the standard threshold and the Residence Nil Rate Band). As with many legal matters, the rules are far from simple, so planning during your lifetime makes sense.

Inheritance Tax and making gifts

IHT is calculated by adding all your assets plus the value of any gifts or trusts made during the last seven years of your life.

In most cases, if you live past the seven years after making a gift, that gift will no longer be liable for IHT. However, if you die during this period, the gift will be added to the total value of your assets and become subject to inheritance tax.

No IHT is due on ‘absolute’ or ‘lifetime’ gifts made at any time from your state. These are also known as “potentially exempt transfers.”

For 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.

Making PET gifts earlier in life will increase the chance of becoming exempt from IHT.

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.

Lifetime Trusts

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. Setting up a Trust may have tax implications, so it is worth researching this and seeking advice before going ahead.

When is a good time to look at making gifts?

The end of the tax year is an ideal time to review your estate and use your annual gift allowance. You can also carry over unused allowance from the previous year, potentially gifting up to £9,000 and saving up to £3,600 in tax. This is also a good opportunity to assess your asset growth and plan for the future. Consider making further Potentially Exempt Transfers (PETs) or establishing trusts to balance your estate and minimize Inheritance Tax.

Next steps

With lifetime inheritance tax planning, you must consider the broader aspects of making gifts before taking action. It is worth seeking professional advice to ensure your actions suit 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.

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