…so, what are the best estate planning options for you and your loved ones?
The Chancellor Jeremy Hunt, announced a tax raid on Inheritance Tax (‘IHT’) in his Autumn Statement last year and froze the threshold above which people must pay IHT for another two years (until 2028). With high inflation, this freeze- which hasn’t changed since 2009, when inflation was lower – means more estates than ever are likely to face an IHT bill and those estates which would already have paid tax, will have to give a larger portion of their estate to the Treasury.
Statistics show that IHT receipts received by HMRC during the financial year 2021 to 2022 were £6.1 billion. This was an increase of 14% (£729 million) on the financial year 2020 to 2021 and was the largest singleyear rise in IHT receipts since the 2015 to 2016 financial year. However, B P Collins’ wills, trusts and probate team is here to help. In this edition of Insight, it advises on the various options available to reduce the value of your estate for IHT purposes and benefit your loved ones. But the key is to plan early.
What is inheritance tax (IHT)?
IHT is a tax levied on your estate when you die. The IHT rate is 40% and is charged on the part of your estate exceeding the tax-free threshold, known as the Nil Rate Band, which is currently £325,000. There is normally no tax to be paid on the estate where the value is below the threshold, or if you leave everything above the threshold to your spouse or civil partner.
There are additional exemptions and allowances available for certain estates such as the transferable spouse exemption (on the death of the second spouse or civil partner), the residence nil rate band and business property relief. It is important to ensure your estate and Wills are structured in the best way to make use of these allowances.
What can you do to mitigate the position for your beneficiaries?
Annual gift exemption
During your lifetime you have an annual exemption of £3,000, which you can gift every year without any tax implications. Any part of the annual exemption which isn’t used in the tax year can be carried forward to the following tax year, but not to any future years after that. Gifts exceeding the £3,000 allowance in any tax year might be subject to Inheritance Tax.
Gifts up to £250
You can give away up to £250 to as many individuals as you wish (although only once a year to each individual) and they will not be subject to inheritance tax, provided they have not benefited from your £3,000 gift allowance (see above)
You can gift up to £5,000 to children, up to £2,500 for grandchildren and up to £1,000 for any individual for a wedding gift and this will be exempt from the IHT gifting rules. However, certain conditions must be met, such as the gift must be given before the wedding and the wedding has to take place.
Lifetime gifting enables you to make gifts of unlimited value, which will become exempt from IHT if you survive the gift for a period of seven years. If you don’t survive the gift by seven years, it would be added to the value of your estate and if the combined value is more than the inheritance tax threshold, then tax may be due.
Again, strict conditions apply, such as you must not retain any interest in the assets gifted otherwise it will not be exempt from IHT, even if you have survived seven years. For example, if you gifted a home to a relative and continued to live it, or gave away a valuable painting but still displayed it in your house.
It is possible for your estate to pay a reduced rate of IHT from 40% to 36% if you give at least ten per cent of your net estate to a charity. It is important your Will is drafted correctly to incorporate this provision. In addition, any gift to charity is exempt from IHT.
Make gifts out of your surplus income
If you have enough income to sustain your regular standard of living, you can make gifts from your surplus income to include paying rent for a relative, into a savings account for a child or giving financial support to other family members. To qualify for this exemption all conditions must be met, and accurate records should be kept, so advice should be sought to check the position, to avoid the risk of the gifts falling foul of the rules and being subject to IHT.
Everyone’s circumstances are unique and there is never a one size fits all solution. Before embarking on any form of tax planning it is vital to seek advice from a solicitor who can help you decide on the best estate planning solutions that are right for you and your loved ones. It is also important to speak with a regulated financial planner who can advise on tax friendly investments and look at longer term financial planning to help you understand how much you can afford to gift.