Inheritance Tax: The definitive guide

What is Inheritance Tax?

When a person dies, and their estate is valued, if it is over the ‘nil band rate’ for inheritance tax (currently £325,000) it will be taxed at a rate of forty per cent. With careful financial planning, you can arrange a Will in such a way that inheritance tax outgoings are minimised or even avoided altogether, ensuring you look after your loved ones by passing on your inheritance to the next generation with minimal losses. Inheritance tax can drain an estate considerably without careful planning, and can sometimes cause beneficiaries financial problems and situations where they have to sell the family home to pay tax debts.

The nil rate band for married couples or civil partnerships is transferable to the surviving spouse on the first partner’s death, which means on the death of the second partner, £650,000 of the estate will escape inheritance tax. If the estate is valued at less than double the nil rate band, there will be no inheritance tax chargeable on the second partner’s death. Anything over and above this amount will be taxed at forty per cent.

Inheritance Tax Planning

It is not the case, as it once was, that inheritance tax problems are the reserve of the wealthy. A house, car or other assets could easily put your estate within the inheritance tax threshold. With the right financial planning, practically everyone with an inheritance tax liability should be able to reduce or even eliminate it. There are a number of different solutions available, and our Trust & Estate Planning Consultants can advise how best to arrange your affairs to mitigate inheritance tax.

There are a few things you can do to minimise your inheritance tax liability; the following is a brief summary:

Gifts

If you give away some of your estate during your lifetime, the amount passed on will be included in the estate for inheritance tax purposes, however, there are some exceptions. Using these exceptions can reduce inheritance tax liability, ensuring your descendants benefit as much as possible from your estate. It is possible to give £3,000 in each tax year, without being liable for inheritance tax, and it is also possible to carry forward the unused portion in the previous year’s exemption – the maximum you can carry forward is one year. Gifts of no more than £250 to any one person are exempt, and these can include gifts to grandchildren. Wedding gifts are also exempt from inheritance tax liability. £5,000 is allowed from each parent, and £2,500 can be given to grandchildren, and £1000 to anyone else. If you have surplus income, you can give this away free of inheritance tax liability. However, you have to be able to show the gifts are part of your regular expenditure and don’t reduce your living standard.

Potentially Exempt Transfers (PETs)

Before you die you can give away some of your property or cash, and these will be exempt provided you survive for seven years after giving them away. For this reason, these types of gifts are called Potentially Exempt Transfers (PETs). After a period of three years have passed, however, your beneficiary may get some tax relief which increases each year until the seven years has expired. It is also possible to transfer your home before you die, but you will not be exempt from inheritance tax unless your child contributes to the upkeep of the property and lives with you until you die or go into a care home.

Business Property Relief

Some types of businesses and business assets may qualify for exemption from inheritance tax. Speak to our Trust & Estate Planning Consultants about property relief to see if you can reduce inheritance tax liability by transferring your business, or some assets from your business.

Donating to Charity

Donating to charity is another option for inheritance tax mitigation, and there are different ways you can go about it. You can donate a fixed sum or an item either within your lifetime or in your Will. You can also state in your Will that you want to donate what is left after all the other legacies have been paid out. Either the donation can be taken off the value of the estate before inheritance tax is calculated, or if you are donating more than ten per cent of the net value of their estate to a charity, you can enjoy an inheritance tax reduction from a forty per cent rate down to thirty-six per cent. The net value of the estate is the sum of all the assets after deducting any debts, reliefs, exemptions and liabilities, and the applicable nil rate band. It may be, however, that only some of your estate qualifies for the reduced rate – and it is highly advisable you seek professional advice from an experienced Trust & Estate Planning Consultant to ensure your beneficiaries will not be paying more tax than is necessary. The charity or charities you choose to donate to is entirely up to you, however, the charity must be a qualifying charitable body; i.e., a charity registered in England and Wales, or a charity registered in the EU, Iceland or Norway that would qualify if it was in England or Wales.

Deeds of Variation for Inheritance Tax Mitigation

If you are a beneficiary to a Will and have found that either a charitable gift was not left in the Will, leaving the estate with a large inheritance tax bill, or if the bequeathed charity gift did not amount to ten per cent of the estate, speak to our Trust & Estate Planning Consultants about a Deed of Variation. The Deed of Variation allows beneficiaries to vary the terms of the Will to include a charity donation or to increase the value of an existing charitable donation in order to gain the reduced rate of inheritance tax. Our professional Trust & Estate Planning Consultants have a vast amount of experience in tax planning for both large and small estates. We will explain your options fully and provide you with a solution to ensure that as much of the estate as possible qualifies for the reduced rate.

Speak to our Will & Estate Planning Consultants about inheritance tax planning. The law surrounding inheritance tax can be highly complex and confusing. We are experienced in inheritance tax planning and will tailor a plan for you which will bring the maximum amount of your estate within the discounted inheritance tax rate. We can explain your options fully, giving you a clear understanding of the options open to you, and guiding you smoothly throughout the entire process. We believe tax planning and writing Wills should be a stress-free and straightforward experience, and our Trust & Estate Planning Consultants seek to ensure our clients are taken smoothly through the entire process of preparing a Will. We work swiftly and with precision, tailoring everything to you and your family’s requirements.

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The team at legacy wills have been very helpful and extremely courteous when talking through the full process with me. Would highly recommend.

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Legacy wills explained every step very clearly and anything you forgot to ask they encouraged you to contact them, they also made you feel that no question was to big or small they would always find the answer.

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