Inheritance Tax Advice

As of the current tax year, the inheritance tax (IHT) rates in the UK are:

• Nil-rate band: The first £325,000 of an individual’s estate is tax-free.
• Residence nil-rate band: An additional £175,000 may be available if the deceased leaves their home to direct descendants, such as children or grandchildren, bringing the potential tax-free threshold to £500,000 for individuals and £1 million for married couples or civil partners. The Residence Nil Rate Band is reduced if the total estate is over £2,000,000
• Above the nil-rate band: Any amount above nil rate band and available residence nil rate band is taxed at 40%.

There are several strategies to reduce your inheritance tax liability, including:

• Gifting: You can give away up to £3,000 each year and immediately fall outside of your estate. There are additional allowances for weddings. Larger gifts will not fall outside of the estate immediately, but may be exempt from inheritance tax if you live for seven years after making them.
• Gifting from regular income: You can make regular payments to another person, for example to help with their living costs. There’s no limit to how much you can give tax free, as long as:
  • you can afford the payments after meeting your usual living costs
  • you pay from your regular monthly income
• Trusts: Setting up a trust can help remove assets from your estate, although these will follow the same rules as making gifts to individuals in that the money gifted to a trust, in excess of the gifting allowance, will still be included in the inheritance tax calculations for up to the first 7 years. Depending in the trust type used, there may also be immediate tax charges. A discounted gift trust may offer some immediate relief for inheritance tax.
• Charity donations: Gifts to charities are exempt from inheritance tax, and if you leave at least 10% of your net estate to charity, the IHT rate on the remainder of the estate can be reduced to 36%.
• Life insurance: Whilst this doesn’t reduce the inheritance tax liability, taking out a life insurance policy written in trust can provide a lump sum to cover the tax liability.
• Pension funds: Pension funds are typically not included in your estate for IHT purposes, so leaving money in your pension can be tax-efficient.
• Spousal exemption: Transfers between spouses or civil partners are exempt from IHT.
• Business relief: Trading businesses may be exempt from inheritance tax. There are also some financial products which make use of the rules about what does and doesn’t qualify for business property relief. Using these types of products can be high risk compared to more traditional collective investment funds however, invested funds could be inheritance tax exempt after 2 years.

Inheritance tax on jointly owned property depends on how the property is owned:

• Joint tenants: If the property is owned as joint tenants, the deceased’s share passes automatically to the surviving owner(s), and the value of the deceased’s share is included in their estate for IHT purposes.
• Tenants in common: If the property is owned as tenants in common, the deceased’s share does not pass automatically to the other owner(s) but according to their will. The value of their share is included in their estate for IHT purposes.

There is however no inheritance tax between spouses. It’s important to plan how jointly owned property will be handled in the context of inheritance tax to minimise liability.

Business Relief (BR) can reduce the value of a business or its assets when calculating inheritance tax:

• Qualifying assets: Shares in an unlisted or AIM listed company, an interest in a business (such as a partnership), or some types of farmland or woodland can qualify for relief.
• Relief percentage: 100% relief is available for qualifying businesses, and 50% relief is available for certain other assets, such as property and machinery used by the business.
• Ownership period: The business or asset must have been owned for at least two of the last 5 years before death to qualify for BR.

Business Relief can be a valuable tool in reducing the inheritance tax liability on business assets, but it is essential to ensure the business qualifies and meets all the criteria.