Inheritance tax planning service

Inheritance tax, or IHT for short, is a tax payable on the assets (money or possessions) you leave behind when you die; it’s often referred to as ‘death duty’. These assets, known as your ‘estate’, can include:

• Cash and savings in the bank
• Investments
• Property and valuables, such as art, jewellery etc
• Vehicles
• Businesses you own
• Pay-outs from life insurance policies not held in trust.

Many estates that are now subject to IHT in the UK belong to people who would not necessarily call themselves wealthy. Anyone whose total estate is worth £325,000 or more – including the value of their home – needs to pay IHT.

The rate is currently 40% and due on anything above the ‘nil-rate band’ of £325,000 (unless your estate also qualifies for the ‘main residence allowance’ – see next question – which adds £175,000 to the inheritance tax nil-rate band).

The main residence allowance applies when someone leaves their main residence to their children or grandchildren. This allowance is currently £175,000, meaning an individual’s allowances could reach up to £500,000 before their heirs have to pay IHT. This allowance is reduced for estates worth more than £2m and subject to certain conditions.

A combination of the ‘standard’ and ‘residence’ nil-rate bands could allow up to £500,000 of your estate to be exempt from IHT and up to £1m for a couple. The residence nil-rate band is gradually reduced for estates worth in excess of £2m and completely exhausted for joint estates currently worth more than £2.7m.

Funds from your estate are usually used to pay your IHT liability to HMRC. The executor/s named in your Will have to deal with this after your death. If you make certain kinds of gifts during your lifetime, but die within seven years after making them, the recipients of the gifts may be liable to pay IHT.

Think about giving away some of your estate, as some gifts are no longer included in your estate for IHT purposes:

• Spouses or civil partners can give each other as much as they want during their lifetime, as long as they are both domiciled in the UK
• You can make gifts to other people, of up to £3,000 in total in each tax year – this is known as the ‘annual exemption’; you can carry forward a maximum of one year, so you could give up to £6,000 in a particular tax year
• You can make any number of gifts of up to £250 each year to separate individuals, to cover things like birthday and Christmas presents, but you can’t combine these with the annual exemption
• You can make gifts to UK-established charities, national museums, universities and certain other bodies
• You can make gifts to people getting married, up to: £5,000 from each parent of the couple, £2,500 from each grandparent or remote relative, £2,500 from bridegroom to bride (and vice versa) and between civil partners, or £1,000 from anyone else.

Making regular gifts out of excess income can be a useful way to prevent further increases in your estate's taxable value. You can give away any surplus income you don’t need for day-to-day expenses, and use these gifts to fund:

• A life assurance policy (see tip 4)
• School fees for your grandchildren
• Pension contributions for adults or minors
• Building up ISA or JISA subscriptions, or
• Sending the family on regular holidays every year.

You need to show that these regular gifts will not affect your normal standard of living, and will come from income rather than capital. You can distribute any unspent income that otherwise would simply accumulate and increase your estate.

Making gifts of assets (cash, art, property etc) can also be an efficient way to reduce the value of your future taxable estate. However, having made a gift, it is crucial that you no longer benefit from the asset/s (known as ‘gifts with reservation’). You must also survive for seven years. Such gifts are also known as ‘potentially exempt transfers’. If you die within seven years, the recipient may have to pay IHT on the value of the gift.

Assets can be given to people and certain trusts. Trusts are complex, so you should seek advice about this. Gifts into trust are usually ‘chargeable lifetime transfers’.

You can insure your potential IHT liability, particularly for assets that are difficult to gift and put into trust, such as property. If you have excess income (see tip 2) you could take out a ‘whole of life’ assurance policy that pays out a fixed amount to cover your estate’s potential IHT liability when you die. If the premiums are paid out of excess income or by using your annual gift exemption of £3,000, they would not be counted as chargeable lifetime transfers. The policy should be written into trust, to prevent the eventual benefit forming part of the estate.

Setting up trusts allows you to keep control of your capital. Some trusts will pay a fixed level of income, while others can offer additional benefits, such as protection for your beneficiaries against the effects of divorce or bankruptcy.

Some assets can qualify for a tax allowance called Business Relief (BR). Once you’ve held these assets for two years, they are exempt from IHT (providing they are still in your estate when you die). Many are unlisted and certain AIM-listed stocks qualify. This approach carries a higher investment risk than other options, but you don’t have to give any assets away, you have ongoing access to your capital, and you don’t have to survive for seven years – just two.