When thinking about what happens to your estate after you are gone, it’s normal to want to make sure your loved ones get the maximum possible benefit from the assets you have built up over your lifetime. While Inheritance Tax (IHT) can make a big dent in the value of your estate, with careful planning it is often possible to significantly reduce your estate’s Inheritance Tax liability, so your dependants will receive more.
There are various options you can use within the Inheritance Tax rules to reduce your estate’s liability. Understanding your options and how to make best use of them can be complicated, however, so it is strongly recommended to take expert legal advice on this issue.
The following is a brief overview of some of the key issues you should consider. For more personal guidance tailored to your circumstances, please contact Richard Smith from our estate and tax planning team.
The importance of the nil-rate band
The nil-rate band (NRB), also known as the Inheritance Tax Threshold, is the threshold value, up to which an estate does not need to pay Inheritance Tax. Currently the NRB is fixed at £325,000 until 2021. No tax will need to be paid if your estate is valued below this threshold or if you are leaving everything above this threshold to:
- Your spouse or civil partner
- To a beneficiary who is exempt from IHT, such as a charity.
If your estate is valued above the threshold, then the part of your estate above this level may be subject to IHT at a rate of 40%.
If you are survived by your spouse or civil partner, then they will be able to take advantage of the Transferable Nil Rate Band (TNRB), which allows them to transfer your unused NRB to add to theirs, up to the value of £650,000.
Since 2017, the Residence Nil Rate Band (RNRB) has been in effect, also known as the ‘home allowance’. This allows you to pass on your home or a share of it to your children or grandchildren, currently at a threshold of £125,000, to reduce its IHT liability. This is on top of the NRB and TNRB. Like the TRNB, your spouse may also benefit from any unused RNRB from your estate, doubling the amount of RNRB available.
Being aware of these thresholds can help you plan ahead to avoid large Inheritance Tax Bills, however the rules are complicated, so it’s important to seek advice from a financial advisor or solicitor.
Five ways to reduce your Inheritance Tax Bill
- Leaving a legacy to charity
Any gifts that are left to a qualifying charity, either during your lifetime or in your will, are exempt from Inheritance Tax. By leaving at least 10% of your estate as a legacy in your will, the rest of your estate will be taxed at a reduced 36% as opposed to 40%.
- Putting your assets into a trust
Assets which are put into a trust are considered not part of your estate and therefore exempt from Inheritance Tax. You may wish to set one up to help pay for a child’s or grandchild’s education or for them to get on the property ladder. The rules around trusts are complex and there can be Capital Gains Tax and/or Income Tax implications to consider. It’s important to get expert advice before setting up a trust.
- Leaving your estate to your spouse or civil partner
If you are married or in a civil partnership at the time of your death, then you can leave your entire estate to your partner, free of Inheritance Tax. There are some exceptions to this rule, so it is always advisable to get some advice before doing finalising anything.
- Regularly giving away gifts to loved ones
Each tax year you are allowed to give away gifts up to the value of £3,000 to your friends and family without them being added to the value of your estate. There are also some types of gifts, such as wedding gifts to certain family members, that may also be exempt in addition to the normal £3,000 a year ‘gift allowance’. Larger one-off gifts that are not exempt may be considered part of your estate for Inheritance Tax purposes if they were made in the seven years prior to your death. The IHT rate that applies to such non-exempt gifts will vary depending on the amount of time that passed between the gift being given and your date of death. Planning ahead and regularly giving to your family can help to reduce the value of your estate and therefore your Inheritance Tax bill.
- Take out life insurance
You can take out a life insurance policy in order to pay some or all of your Inheritance Tax, which can protect your loved ones from being left with a huge tax bill to pay, during an already distressing time. It’s important to note that most life insurance will count as part of your estate unless they are written ‘in trust’, which means that money is paid to your beneficiaries rather than going towards your estate. However, there may be some exceptions, so it’s important to seek the correct advice before taking out any policy.
These are just some of the ways in which you can reduce your potential Inheritance Tax Bill and the impact on your loved ones. Estate and tax planning involves many complicated rules, so it is essential that you discuss all your options with a qualified financial expert or solicitor.
At Preston Redman, we are committed to understanding the needs of our clients and their families and can offer tailored and prompt advice to meet them. For expert advice and a no obligation estimate, contact Richard Smith on 01202 292 424.