Inheritance tax: minimise your liability
Planning to minimise the liability to inheritance tax (IHT) is a team effort involving you and your professional adviser. To enable long-term objectives to be set, it is necessary to make decisions about your finances and your family. Currently only 5% of estates have a liability to IHT. However, with increases in the threshold failing to keep up with the speed of house price growth over the last 15-20 years, increasing numbers of people have found that the value of their home (even with the current downturn) has taken them over the IHT threshold.
IHT is currently payable at 40% on assets exceeding £312,000 (2008/09), so if you own your own home, and have some savings and other assets such as shares and securities, your estate could be liable. This makes early IHT planning essential. So how can you minimise your liability to IHT?
IHT reliefs
There are a number of reliefs available – perhaps most importantly relief on business and agricultural property, which effectively takes most of such property outside the IHT net. Subject to the two-year minimum holding period, business property will generally attract 100% or 50% property relief.
Transfers between spouses
Transfers of assets between two UK-domiciled spouses are exempt from IHT, regardless of whether they are made during a person’s lifetime or on their death. The transferable nil-rate band means that if the bulk of one spouse’s estate passes on death to the survivor, the proportion of the nil-rate band unused on the first death goes to increase the total nil-rate band on the second death.
Gifting strategies
Introducing a programme of lifetime gifts can also significantly reduce the IHT liability on your estate and make use of available lifetime exemptions. This has the advantage of allowing you to witness the benefits they bring to your family members, while also escaping IHT as long as you survive the gift by seven years and no longer continue to benefit from the gift yourself. A discount can also apply where lifetime gifts were made between three and seven years before death (note that the discount applies not to the gift, but to the tax on the gift). Gifts to charity are generally exempt from IHT.
Trusts
Trusts can be used to help maintain a degree of control over the assets being gifted, for example in the case of younger recipients. Including a nil-rate discretionary trust in your Will can create the opportunity for assets worth up to £312,000 to pass to beneficiaries other than your spouse. Life assurance policies can be written into trust in order that the proceeds will not form part of the estate on your death. Talk to us about using trusts to suit your planning needs.
Considering the family home
The introduction of the transferable nil-rate band means that there is perhaps less pressure on some couples to sell the family home and make gifts to reduce their taxable estates, or on children who will have to raise the funds to pay the tax due when their parents die.
However, it is still worth considering selling the house and buying a smaller property in order to release cash which can then be used to make gifts and to fund living expenses (and to reduce the expense and effort needed to maintain the former family home).
Remember, there are many ways to reduce the IHT payable on your death, through lifetime planning and action – speak to us if IHT remains a concern.
Contact us for more information and advice.