Managing inheritance tax liabilities
For those who may be affected by a future inheritance tax liability, good estate planning can be important. Carl Lamb explains
If you own your own home and have built up significant wealth through judicious savings and investments, then you may have concerns about the impact that inheritance tax (IHT) may have on the estate that you leave for your heirs.
Every individual has an IHT-free allowance of £325,000, known as the nil rate band (NRB). If you are married or in a civil partnership, you can leave as much of your estate as you like to your partner without incurring an IHT charge (but not if you are a cohabitee).
If you leave some or all your estate to someone other than your spouse or civil partner, then that part of your estate will count towards your NRB and anything over the allowance will be subject to a 40% IHT charge.
If you have any unused NRB on your death you can pass it on to your spouse or civil partner, so the surviving spouse/civil partner can potentially amass a combined NRB of up to £650,000.
There is a further IHT allowance for anyone who is passing their main residence (or its value) on to their direct descendants (children and grandchildren). Depending on the value of the property, this could give an additional NRB of up to £125,000 to an individual who dies in the 2018/19 tax year – and is due to go up to £175,000 by 2020/21. If unused, this element can also be passed on to a spouse/civil partner on death, giving a total potential combined NRB for a qualifying couple of £1 million in 2020/21.
If your estate will exceed the relevant NRB, there are measures that you can employ to mitigate a potential future IHT charge, including lifetime gifts.
There are annual IHT exemptions for gifts: you can give up to a total of £3,000 per year without impacting your NRB, plus up to £250 per year to as many individuals as you like. Gifts to charities (and political parties) are also exempt from IHT. Wedding gifts are IHTexempt too, up to specified limits.
In addition, you can establish a pattern of regular giving from surplus income (not from investments or by selling assets) that can potentially be considered exempt. Do get advice if you would like to take advantage of the latter as it must be properly set up and documented to qualify for the exemption.
If you make gifts that don’t qualify for the above exemptions, then some or all of it may be included in your estate for IHT purposes if you die within seven years of making the gift.
Good planning throughout your lifetime can help to ensure that the value of your estate is managed to keep your future IHT liability under control.
This article is based on our understanding of current tax rules which are subject to change. For independent advice, contact Almary Green on 01603 706740 or email firstname.lastname@example.org. Please remember that the guidance here is generic and we recommend that you get individual personalised advice. almarygreen.com
You don’t want to take a hit on IHT