Death and Taxes
Since the 2009/10 tax year IHT receipts have more than doubled from £2.4 bn to £5.2bn in 2017/18.
Average UK property prices have risen by more than 45% since 2008, and property accounts for the bulk of most estates. Unfortunately, there has been no change in the inheritance tax threshold since 2009. This means that more estates are subject to inheritance tax than ever before.
So, what planning can be done?
Use your allowances
The threshold before IHT becomes payable has been £325,000 since 2009. Anything in excess of this potentially subject to tax of up to 40%. The threshold can potentially be transferable to a surviving spouse or civil partner, giving a total of up to £650,000 before IHT.
In 2017/18 legislation introduced a ‘residence nil rate band’ if a home is left to direct descendants (i.e. children or grandchildren). It is the value of the house or a maximum of £150,000 (rising to £175,000 in 2020/21). It is also transferable, which means for certain estates from April 2020 an amount of up to £1m could be passed without an IHT liability.
The availability of this residential threshold does depend on how the property is inherited as using certain trust arrangements for direct descendants might result in its loss. It is also tapered away for larger estates over £2m (reduced by £1 for every £2 the estate exceeds £2m).
Another consideration is if you leave 10% of your estate to charity. The rate of tax of 40% can be reduced to 36% and the charitable gift itself is also exempt from IHT.
Consider lifetime opportunities
It may be that you spend any surplus doing more of the things you love so that you don’t miss out or have any regrets. But if you still have enough there are several options.
You can make “exempted” gifts each tax year which include the annual £3,000 and gifts for things like weddings. You can make regular gifts from surplus ‘income’ if it doesn’t affect your standard of living. These exempt gifts are immediately outside your estate for IHT purposes.
Alternatively, you can gift an amount of capital away and on surviving 7 years, then that amount will not count towards your estate value.
If you want an element of control, or children are involved, you could use a trust. The trust can subsequently invest according to the needs of the initial ‘settlor’ and/or beneficiaries. The amount gifted to certain trusts will be important as exceeding the IHT threshold (of £325,000) can result in entry, periodic or exit taxes as trusts are subject to their own taxation rules.
There are also certain investments that don’t require a trust structure, that after 2 years can become eligible for tax relief of up to 100% when calculating IHT. These provide for direct control and the ability to buy and sell in the future, but typically have a higher capital risk and are not appropriate for all.
The use of life cover to potentially match any IHT liability works for some, or after careful consideration and advice there is even equity release for property owners.
Lastly, recent pension legislation means certain schemes are not considered part of your estate. This makes them an option for estate planning.
bdhSterling can help to establish your financial position including aspects such as Inheritance Tax. See here for more information.
This article shouldn’t be taken as financial advice and is based on our understanding in May 2019