You’ve worked your entire life and now are thinking about how you can ensure your children and grandchildren receive the inheritance you want them to – without being buffeted by inheritance tax (IHT). It’s time to think about your estate planning strategy.
And now with the Autumn Budget placing a combined £1 million limit to the 100% agricultural property relief (APR) and business property relief (BPR) schemes (although charging IHT on affected estates at 20% and allowing them to pay it over 10 years), more families are worried about IHT. Let’s look at some of the key strategies involved in IHT planning and how you can preserve your wealth for the future.
Inheritance tax thresholds
The normal rate of IHT is 40% and levied on the estate of a deceased person, their estate being all the money, assets and property they own. It is up to the individuals who inherit to pay any IHT bill.
However, IHT is only levied on estates worth £325,000 or more – and then only on the value that exceeds £325,000. This allowance is called the ‘nil-rate band’. There is also the residence nil-rate band, which you can claim if you pass your main residence to direct (children or grandchildren). This allowance is £175,000 per individual.
Together, these allowances mean that you can claim a total IHT allowance of £500,000 (£1m for a married couple or civil partners). Knowing how much of your estate exceeds this value is essential for then working out a strategy to reduce the potential IHT bill. Agricultural properties will be able to protect the first £1.5m (£3m for married couples).
Lifetime gifts: Reducing the value of your estate
One strategy for reducing the value of your estate (without selling assets or property) is to give gifts to your loved ones during your lifetime.
The government allows individuals to gift up to £3,000 per year without the recipient having to pay IHT. This is known as the annual exemption. You can carry forward any unused exemption from the previous year, allowing a maximum of £6,000 in tax-free gifts in a single year. There is also the small gifts allowance – gifts of £250 tax-free to any number of individuals each year.
You can also give a tax-free gift to someone getting married or starting a civil partnership. You can give up to £5,000 to a child. £2,500 to a grandchild or great-grandchild, and £1,000 to anyone else.
For gifts above the exemption limit, the seven year rule applies. This says that for large gifts to be tax-free, you must live for another seven years. So you can give whatever gift you like tax-free – but it must be a genuine gift and you cannot benefit from it to count. In other words, the seven year offers taper relief on the value of gifts that exceed the relevant allowance:
|
Years between gift and death |
Rate of tax on the gift |
| 3 to 4 years | 32% |
| 4 to 5 years | 24% |
| 5 to 6 years | 16% |
| 6 to 7 years | 8% |
| 7 or more | 0% |
Using trusts to protect wealth
Trusts are an effective tool in IHT planning, allowing you to pass assets to future generations. When your assets or property are placed into a trust in a way that meets certain conditions, they are no longer part of your estate. There is therefore no IHT to pay.
For example, money and assets placed in a bare trust will be free from inheritance tax as long as the person setting it up lives for at least another seven years.
However, setting up a trust is a complex decision as you need to choose the right sort of trust for your aims – and there are more taxes than just IHT when it comes to trusts. Make sure to speak to an expert before transferring your assets and property into one.
Talk to us about your inheritance tax strategy. We’ll help adapt the advice in this article to your unique situation.
Note: The value of your investment may go down as well as up. You may not get back what you initially invested.