Inheritance Tax Planning Ahead of the New Tax Year

approaching tax & accounting deadlines

Inheritance tax (‘IHT’) planning takes many years to implement and as such, if your estate is likely to be impacted by IHT, it is important to review on a regular basis.

With the tax-year coming to a close, we have highlighted some important things for you to consider:

Review Your Estate

The first step in planning for IHT is to review your estate to determine if your estate is exposed to a potential IHT liability. We recommend keeping a living asset schedule which can be updated and track your exposure. It is also a useful tool for executors when administering estates.

Inheritance Tax Free Gifting

Gifts usually fall within your estate for IHT purposes if you do not survive seven years after making the gift, unless it falls into one of the various IHT exemptions.

Gifts are over the whole tax-year, and some of the key exemptions that you can benefit from are as follows:

  • Gifting up to £250 per person per tax-year, to as many people as you want
  • Wedding gifts of up to £5,000 to a child, £2,500 to a grandchild, and £1,000 to a relative or friend

Regular Gifts out of Surplus Income

One of the most beneficial relief’s from IHT is regular gifting from surplus income.

How this works in practice, is that assume you have an annual income of £100,000, but you only use £60,000 to maintain your standard of living. The remaining £40,000 can be regularly gifted and as it is being gifted out of your taxed income, it does not fall within IHT.

A common use of this exemption is to pay for grandchildren’s school fees, for example.

If surplus income is not gifted or spent, it increases your estate and may be subject to tax at 40% upon your passing.

Annual Exemption

Each individual receives an IHT annual exemption of £3,000 per year.

Where a gift is made to an individual that does not fall into one of the exemptions listed above, or is not a regular gift from surplus income, the annual exemption of £3,000 is available. If you have not used the previous years annual exemption you can make in the next year, therefore giving £6,000 available to gift.

If your estate is effected by IHT, and you have not made gifts to utilise your annual exemption, we recommend doing so as this will reduce your estates IHT liability by up to £1,200.

Seven Year Rule

Any gifts to individuals not falling into any exemptions listed above are not charged to IHT immediately, instead a seven-year rule applies.

This means that if you survive the gift by seven-years, it is removed from your estate entirely and there is no IHT to pay.

If you survive the gift by between 3-7 years, the gift will fall within your estate but will be reduced on a sliding scale basis which is called taper relief. The closer to 7 years, the less tax payable.

If you do not survive the gift by 3 years, the gift will remain as part of your estate and is taxed at up to 40%.

It is therefore important to review any gifts made in the last seven years to determine if they fall within your estate and to plan future gifts so that you give yourself the best chance of surviving the gift by seven years.

Trusts

Trusts are still a helpful mechanism for IHT planning and especially for family wealth protection.

Trusts may be preferable to outright gifts where you wish to retain a level of control.

On gifts into trust, there is usually a charge to IHT of 20% however where the gift into trust is below £325,000 in most cases there will be no tax payable.

The trusts also pay a periodic charge every 10 years based on the value of assets in the trust, but again when assets are below £325,000 there is often no tax to pay. There are also exit charges on assets leaving the trust.

Trust assets do not fall within your estate for IHT (in most cases) and can be used to effectively mitigate IHT.

Will

Wills should be reviewed at regular intervals to ensure it still represents your wishes but also that executors named in the will as still relevant.

Often, simple changes to your will can reduce the overall inheritance tax paid by the family significantly.

To provide a simple example, if you have one daughter, one granddaughter and own a commercial property worth £1,000,000 (with an IHT liability of £400,000).

You wish to pass the property down the bloodline and as such leave this to your daughter and IHT of £400,000 is paid.

If your daughter survives you by 10 years, and leaves the property to your granddaughter, a further 40% IHT is payable based on the value of the property, which is likely to have increased, so IHT of up to £400,000 – £600,000 may be payable.

However, if your daughter was sufficiently wealthy where she doesn’t need the property, you could instead leave the property to your granddaughter (either directly, or in trust). In this example, there is no second charge to IHT saving in excess of £400,000 tax.

Often, and understandably so, people do not review the tax consequence of their will but doing so often results in significant tax savings so should again be done on a periodic basis.

How We Can Help

We offer a comprehensive family wealth tax planning review where we can review the above for you and suggest any appropriate mitigation strategies, and assist with implementation.

If you feel you would benefit from the above, please contact Jordan Kelly [email protected]