How much of your hard-earned money will the taxman get his hands on?
Inheritance Tax (IHT) in the UK may be one of life’s unpleasant facts but IHT planning and quality advice could help you pay less tax on your estate.
For the 2011/12 tax year, no IHT is charged on the value of your estate up to £325,000. This is known as the ‘nil rate band’. Everything above this is taxed at 40 per cent. This allowance is unchanged since April 2010 and has been frozen at this level until the end of this parliament. In real terms the allowance is decreasing.
If an individual’s IHT nil rate band is not used up on their death, the unused proportion can be transferred to their surviving spouse or civil partner. Please note that the additional nil rate band has to be claimed by the Executor’s of the widow(er)’s Estate and that HMRC will require the following documentation (often 20 or more years after death);
a copy of the first will, if there was one
a copy of the grant of probate (or confirmation in Scotland), or the death certificate if no grant was taken out
a copy of any ‘deed of variation’ if one was used to vary (or change) the will
Assets passed between spouses or registered civil partners are exempt from IHT (assuming the spouse or partner is domiciled in the UK), regardless of the worth of the assets and how soon you die after acquiring them.
Reducing your family’s tax bill
Any amount of money you give away outright will not be counted for IHT if you survive for seven years after making the gift. If you die within this period, the amount of the gift will be included within your estate. Taper relief may apply in these circumstances and can reduce the amount of IHT due. If you start gifting early enough each individual can reduce their Estate by £1.3 million over a 28 year period (four times IHT exemption at current levels by gifting every seven years). The type of Trust that you use should be carefully considered – many allow you to retain an interest in an income, some make this “income” available in a similar way to keeping hold of your capital, others allow loans to widow(er)s. Independent Financial Advice is essential as the cost of various Trusts differs enormously.
Certain assets are currently exempt from IHT. Business assets such as privately owned businesses, furnished holiday lettings, some commercial property and certain qualifying investments such as Enterprise Investment Schemes (EIS) and AIM listed shares are exempt, provided they have been held for two years continuously, during the previous five years. Investors should note that the IHT tax concession is given on these investments because they tend to be more risky than mainstream investments. EIS investments also benefit from income tax and capital gains tax concessions as these are perhaps the most risky.
Gifting your nil rate band into a Will Trust still has advantages despite the ability to transfer any unused nil rate band to the surviving spouse. It ensures that the assets cannot be used to pay for Nursing Fees, or squandered by a subsequent spouse, while allowing the survivor to enjoy income or the benefit of residing in the matrimonial home. Many Will Trusts allow the survivor access to capital by way of loans that accrue interest and count as a debt against their Estate, further reducing the final IHT liability. Good advice is essential in this area and Trustees should be chosen with care as they will control the Trust’s assets.
Inheritance Tax is often described as a voluntary tax as, with careful planning, steps can be taken to avoid it altogether or, at worst, mitigate the effects of it. The old adage, “if you fail to plan, you plan to fail”, is perhaps most pertinent in this area of Financial Planning as the cost of failing to take action can be enormous.