It is a common phobia amongst clients, that when they die, a proportion (possibly sizeable) of their estate is going to fall into the hands of the Tax Man. Inheritance Tax is currently charged at 40% on anything over £325,000.00 (this is known as “the nil rate band”). A surviving spouse or civil partner can claim up to 100% of their partner’s allowance giving them a threshold of up to £650.000.00 in the current tax year. This, for many people, has helped take their estates out of the Inheritance Tax Liability, however for anyone else, who is perhaps unmarried, or has considerably more than the £650,000.00 threshold, the question arises, is there anything that can be done to minimize the amount of Inheritance Tax payable? Below are a number of possible ways in which this can be achieved;-
- Make a Will – this way, you will ensure that the assets that you have worked long and hard for and already paid tax for over the years, are passed on as you wish. Particular care needs to be taken in cases where a Widow or Widower remarried having claimed 100% of deceased’s IHT Allowance. If he or she would die before the new Spouse, leaving everything to that person, one nil rate band would be lost as the survivor cannot have three.
- Give away Assets – you can gift up to £3,000 a year free of Inheritance Tax. You can also give £250.00 to any number of persons every year although you cannot combine this with the annual £3,000 exemption.
Parents can give gift £5,000 to each of their children as a wedding or civil partnership gift. Grandparents can gift £2,500 and anyone else £1,000. Gift to Registered Charities, Political Parties are also exempt.
- Pay attention to the seven year rule – you can make further tax free gifts (these are known as “potentially exempt transfers – or peps”) although the catch is that you must outlive the gift for 7 years for the gift to fall outside your estate. If you die within 7 years and the gifts are worth more than the nil rate band, taper relief may apply i.e. if you die within 6 years the tax due will be less than if you die after one 1 year.
You can give away most assets including cash and shares but these have to be outright gifts from which you no longer benefit. Therefore if you attempt to gift the family home and continue to reside there, the Revenue are likely to class same as a “Gift with Reservation” and include the value of same as part of your estate. This is unless you pay a full market rent for the property and comply with the other tenancy requirements i.e. having a property tenancy agreement/rent book etc. Even then HMRC will scrutinise in detail any such arrangement.
- Consider setting up a Trust – Assets that are placed in a “bare” trust that is where the beneficiary entitled to the assets receive same at 18, count as a potentially exempt transfer. Unless you are disabled, gifts into most other types of trusts are limited to the nil rate band unless the person setting up the trust is happy to pay a 20% immediate tax on the excess. A further 20% is due if the person making the gift dies within 7 years.
- Business Property Relief – You may wish to consider in investing in Assets that will attract business property relief. These can include shares listed on the AIM. Such holdings are free from IHT after 2 years. However, prior to investing on AIM’s shares, you need to bear in mind that these shares can be extremely volatile.
- By Farmland – Farmland itself qualifies for Agricultural property relief of up to 100% after 2 years of ownership. In order to take advantage of such agricultural relief, you would need to ensure that your use of the land, complies with the Revenue’s legislation. For e.g. you need to actively be working on the land for agricultural purposes as a commercial business.
- Explore Insurance Avenues – A common Inheritance Tax solution is to take out a whole-of-life Insurance Policy which can be used to pay your Inheritance Tax Bill. The Policy should be held in trust to avoid the proceeds falling inside your estate and increasing your IHT liability any further.