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Inheritance Tax (IHT)
Inheritance Tax (IHT) is currently chargeable if your estate’s value exceeds the IHT nil rate band of £325,000, however effective tax planning can substantially reduce the amount of tax payable, leaving more of your estate for your loved ones rather than HM Revenue & Customs.
The Government will add an additional £100,000 ‘main residence’ property allowance in April 2017, rising by £25,000 each year until it reaches £175,000 in 2020. This means the amount that can be passed on tax-free will be £850,000 per married/ civil couple, made up of the standard £325,000, plus the new £100,000 for the main residence, meaning a total of £425,000 per person. Your ‘estate’ includes the money you have in the bank, investments and any property or business you own, then debts are deducted.
The full allowance will only be accessible if your estate as a couple is worth at least £1 million in 2020, although it is intended by the legislation to provide relief where individuals have ‘downsized’. Additionally, where couples own and occupy more than one property then there will be an option to nominate which is the main residence. If your estate is worth more than £2million overall, the additional allowance will be withdrawn at £1 for every £2, creating an effective marginal Inheritance Tax rate of 60% for estates valued between £2-2.7million. There is no doubt these measures are actually more complex then they appear at face value and hold traps for the unwary.
Inheritance tax is charged at 40%, or 36% if you leave at least 10% of your assets to a charity, on the value of your estate in excess of the nil rate band. So, for example, if you leave an estate worth £500,000, no IHT is paid on the first £325,000, but 40% is paid on the remaining £175,000k – a total tax bill of £70,000, if you are not leaving anything to charity.
If your estate is valued at less than the nil rate band, IHT is not payable nor is it payable on any inheritance you leave to your spouse/ civil partner provided they are UK-domiciled. Special rules apply for non-domiciled souses/ civil partners.
You can reduce IHT by giving away up to £3,000 a year and small gifts to other people of up to £250 each. Regular gifts out of income (but not capital) also reduce IHT, as do gifts to help maintain dependent relatives.
Larger gifts can avoid IHT provided you survive at least seven years after making the gift. To qualify, you must not continue to benefit from the assets you have given away, although you can put assets into trust, e.g. for the benefit of children or grandchildren, and remain in control of the money as trustee.
Other IHT reliefs include reduced IHT on some business assets. Death benefits from most pension schemes are exempt from IHT but special planning is required if your pension scheme is substantial to avoid unexpected IHT bills after your death.
The best IHT planning tends to be done early and taking a long-term view. Clifton Ingram LLP Solicitor’s Tax Planning, Wills & Probate team is one of the largest, most qualified and experienced in the area, with a reputation for delivering considered and practical advice combined with technical excellence.
Our solicitors in Reading and Wokingham include members of the Society of Trust and Estate Practitioners (STEP), and we can help you plan and structure your finances to help you control your tax liabilities.
Head of Tax Planning, Wills & Probate