In the first part of this series, our blog on Lasting Powers of Attorney considered what needs to be put in place in case we should lose the ability to make our own decisions. In this second blog post of the series we move on to consider what can be done to avoid paying tax when we die.
Inheritance Tax (IHT) is a type of tax payable, usually, on death, but sometimes on gifts made during your lifetime.
When you die a value has to be put on all of your assets and liabilities. Your assets may include property, bank accounts, stocks and shares, business interests and other investments.
You may leave a certain amount of your estate without your beneficiaries having to pay IHT on it.
However, if you leave your estate to anyone other than your spouse, civil partner or to charity, the government charges IHT at a rate of 40% on the value that exceeds what is called the nil rate band.
The nil rate band is currently set at £325,000. So, if you die leaving an estate worth £500,000 to your children, your estate will pay IHT of £70,000 (£500,000 – £325,000 = £175,000 x 40% = £70,000).
Inheritance Tax and couples who are married or in a civil partnership
If you leave your assets to your spouse or civil partner then, you also pass to them your nil rate band. So, when they die, they can have a value of up to £650,000 which they can leave without IHT becoming payable (£325,000 + £325,000). This is called the Transferable nil rate band.
Inheritance Tax and property
If you have a home and leave this to a direct descendant or a certain type of Trust, you can pass a higher value to your family without IHT becoming payable. This is called the Residence nil rate band and for the tax year 2019-2020 this is £150,000.
In the same way as the Transferable nil rate band, this can be passed to a spouse or civil partner on the first death. So, if everything is worked correctly, on the second death of a married or civil partnered couple, a value of up to £950,000 could be passed without IHT becoming payable (£325,000 + £325,000 + £150,000 + £150,000).
There are some special rules for people who don’t now own a home and for people whose estate is worth more than £2m. The government have detailed online guidance relating to this, which can be found here.
Gifting during your lifetime
There are a number of gifts that you may make during your lifetime to reduce the value of your assets on death. These gifts are completely free of IHT:
Each year an individual is able to make gifts of capital of up to £250 to any number of people.
Each individual may gift capital of up to £3,000 per tax year. If the allowance has not been used in the preceding year it can be carried forward to the present year, but you can only do this for one year.
Normal expenditure out of income
If you have excess income there is an exemption that allows you to give away that income.
However, there are specific rules:
- the gift must be part of your normal expenditure; and
- taking one year with another, the gift must be made out of your taxed income; and
- after allowing for all gifts forming part of your normal expenditure you are left with sufficient income to maintain your usual standard of living.
Gifts in consideration of marriage or civil partnership
The gift should be made before or at the same time as the marriage or civil partnership. If the gift is made afterwards, there are some strict rules that need to be adhered to. Parents can give their children £5,000 and a grandparent or other relative can give £2,500. For anyone else it is £1,000.
Gifts for the maintenance of family members
Gifts to maintain a child or dependent relative would generally be exempt. Where the gift is in respect of a child, the gift has to be for the maintenance, education or training of that child up to the age of 18, or until the completion of full-time education. If the gift is for a dependent relative (that is a person unable to maintain him or herself because of old age or infirmity) it must be reasonable for the provision of care or maintenance.
Gifts to charities, political parties and other approved bodies
These are entirely exempt from Inheritance Tax, whether made during lifetime or at death.
Assets that are not subject to IHT or limited IHT when you die
There are two circumstances which can help reduce the value of an asset for IHT purposes when you die.
Agricultural property relief (APR) is a relief from IHT. It reduces the value of an asset by either 50% or 100%, meaning that if a property asset qualifies for 100% relief it could be passed IHT free. This might apply to assets such as farm houses, woodland or agricultural land.
Business Property Relief (BPR) works in the same way, reducing the value of assets. Sole trading businesses, shares in a partnership and unquoted shares qualify for 100% – the rest qualify for 50% relief. Relevant business property might include certain business interests and assets, including AIM shares. However, there are strict conditions that must be met and in respect of AIM shares, not all will qualify.
What should I do now?
It’s probably not a good time to do anything too extensive. Prior to the election in 2019, the Conservative party indicated that they intended to make radical changes to IHT.
The spring budget is fast approaching and in that we’re likely to have all of the changes alluded to last year and some more! However, it’s worthwhile making sure that you make use of the exemptions for gifts made during your lifetime in case these are taken away or changed.
When we know what the changes are, we’ll do another blog to update you.
How Renaissance Legal can help
We specialise in advising our clients how to effectively plan for their own future, as well as that of their family. Our expert team are able to advise you on the right approach for your individual circumstances to ensure that you are able to feel confident in the choices that you make.
Inheritance Tax planning should not be considered in isolation. You may need to consider making or reviewing a Will, and we might need to work with other professional advisors (for example, your IFA and Accountant) to make sure we offer you the best advice suited to your personal circumstances.
Please contact us for more information.