Inheritance Tax (IHT) is a tax that is payable on death. It could possibly one of the most unpopular taxes in the UK. It is sometimes viewed as an optional tax, as there are numerous ways to reduce or eliminate it.
With more people’s wealth invested in their property, the Office for Budget Responsibility (OBR) has found that the number of families paying inheritance tax is at a 35-year high and 45,100 families are expected to face an inheritance tax bill in the 2016/17 tax year.
Nil Rate Bands
Everyone’s estate (the value of everything you own) is exempt from Inheritance Tax up to a certain threshold (£325,000 in 2015/16). This is also known as the “nil rate band”.
It is no longer a tax that targets only the very wealthy, either. The nil-rate band may have been frozen at its current level of £325,000 since April 2009 but the average price of a UK property has risen 33 per cent over the same period.
Married couples and registered civil partners are also allowed to pass assets from one spouse or partner to the other during their lifetime, or when they die, without having to pay Inheritance Tax. This is known as the (UK) Spouse or Civil Partner Exemption.
Since October 2007, you can transfer any unused Inheritance Tax threshold from a late spouse or civil partner to the second spouse or civil partner when they die. This can increase the Inheritance Tax threshold of the second partner from £325,000 to as much as £650,000 (2014/15), depending upon the circumstances and the nil rate band in force at the time of the first death.
Typically if a person leaves everything they own to their surviving spouse or civil partner in this way, it is not only exempt from IHT but it also means that they haven’t used any of their own IHT nil rate band and it is therefore available to increase the nil rate band of the second spouse or civil partner when they die (even if the second spouse has remarried).
This means that their estate can be worth up to £650,000 in 2015/16 before they are liable for any Inheritance Tax.
The ‘residence nil-rate band’
The ‘residence nil-rate band’ can be claimed by the estates of people who die after 6 April 2017, and it will start at £100,000 per person – increasing by £25,000 every April until 2020, when the £175,000 maximum will be reached. From April 2021, it will increase by inflation every year. This is in addition to the nil-rate band.
As the name suggests, the ‘residence nil-rate band’ only applies to your main residence. It is only available where the main residence is passed on death to a direct "lineal" descendant. Estates above £2 million will have the ‘residence nil-rate band’ reduced by £1 for every £2 over the threshold.
It may still be possible to claim the ‘residence nil-rate band’ if a person downsizes or sells their home after 8th July 2015.
There are some important Inheritance Tax exemptions that allow you to make gifts to others and not to have to pay tax upon them when you die. These include the “7 Year Rule” (Potentially Exempt Transfers or PETs), Annual Exemption, Exempt Gifts, Gifts into Trust etc. Please contact us for a more in-depth discussion about your own circumstances.
You can use Trusts to pass assets onto others, for example to those who aren’t immediately able to look after their own affairs, such as your children.
Gifts into a Trust may still be subject to Inheritance Tax if your estate, including the amount being transferred, is over the Inheritance Tax nil rate band threshold (£325,000 in 2015/16).
The Financial Conduct Authority does not regulate Trusts.
Making a Will
Making a Will can be fairly simple and low cost but is always seen as one of the corner stones of estate planning.
If you don’t leave a Will, your estate will be shared out amongst your next of kin according to a strict order of priority called the “Rules of Intestacy”. (This means that people you want to benefit from your estate might get nothing).
You may also have specific bequests that you wish to make, or events that you only wish to happen in certain circumstances, or monies that you only wish to be passed on at a certain age etc., etc.
The Financial Conduct Authority does not regulate will writing.
Lasting Powers of Attorney
A Lasting Power of Attorney (LPA) is a legal document that allows you to select the people that you would trust to make decisions on your behalf on matters such as your financial affairs and your health and welfare at a time in the future when you no longer wish to make these decisions or when you may lack the mental ability to do so.
Clearly, the time to consider making an LPA is when you are in good health rather than poor health.
LPAs replaced the “Enduring Powers of Attorney" (EPA) although EPAs made before October 2007 remain effective and can be registered in the same way that the new LPAs can.
Death and Probate
Bereavement is often a difficult and emotional time, and dealing with the legal side of death, the taxman and possibly attending Court can seem complex. Sometimes it is sensible to pay a professional to deal with this but in simple cases, it is often possible for these to be handled by anyone who can handle the paper work.
Making Gifts to your Family
As your children grow older and have their own families, at some point you may want to make a “Gift” of money to help them out or simply to advance part of their eventual inheritance to them early.
You may want to assist with the purchase of a home or help them out of some financial difficulty.
With some Gifts you don’t need to worry yourself about Inheritance Tax issues, and some you do.