Tips to minimise inheritance tax from your estate
PUBLISHED: 10:23 07 September 2015
Give more to your loved ones and less to the government. Tax specialist Richard Smith shares some simple legal tips for minimising inheritance tax from your estate
It is worth considering whether inheritance tax (IHT) actually applies to you. Every individual has a tax-free allowance of £325,000, known as the nil-rate band. IHT only applies to the value of your estate above the nil rate band, at a rate of 40 per cent on death. Furthermore, transfers between husband and wife are exempt from IHT and if the nil-rate band is not used on the first death, this means that the value of the estate on the second death that will be exempt from IHT doubles to £650,000, providing certain stipulations are satisfied.
Write a will
Where there is no will, the law decides what happens to the estate, along with a possible immediate charge to IHT on the first death, depending on the size of the estate. Setting up a will is also important for those who aren’t married or don’t have children, as under the rules of intestacy the estate would pass to their parents (rather than brothers or sisters), potentially leaving them an IHT liability in turn. Finally it is of utmost importance for those who are living together, to make wills as partners are not covered under the rules of intestacy.
Make full use of exemptions
Every individual can give away an annual allowance of up to £3,000 a year, this is exempt from IHT. You can make a further gift of £3,000, if you haven’t made any in the preceding tax year. There is also a small gift exemption, meaning you can give up to £250 to as many people as you like. In the case of wedding gifts: up to £5,000 for parents, £2,500 for grandparents and £1,000 for everyone else.
Gifts of cash or indeed assets more than the annual allowance may also be exempt as long as you survive for seven years from the date of the gift and do not retain any benefit. These are known as potentially exempt transfers or PETs and are governed by the seven year rule.
You are able make ‘gifts out of ordinary income’ free from IHT. These must form part of normal expenditure, be made out of income and they cannot reduce your general standard of living. This exemption is claimed by the executors of your estate, so it is vital to keep records both of gifts made and of your normal expenditure and maintain these for at least seven years.
One of the easiest ways of providing funds to pay an IHT liability is to establish a whole-of-life insurance policy. This pays a sum equal to the tax liability into trust where the money is exempt from IHT and will be available for beneficiaries to pay the tax due without any need to wait for grant of probate. These are not appropriate for everyone, so advice from a suitably qualified IFA should be taken before considering this option or visit steeleraymond.co.uk.
Richard is a Partner on Steele Raymond’s Private Client team, specialising in inheritance tax planning, administration of estates, trusts, wills and also Powers of Attorney.
For more information, or to arrange a meeting, please contact Richard Smith or his tax specialist colleagues Sue Adams or Paul Causton on 01202 294566..