Written by Ryan Caisley DipFA
Inheritance Tax (IHT) is a hugely unpopular and controversial form of taxation that is a very clever and dynamic beast. When discussing IHT with clients, many find it one of the most unfair taxes as some people take the standpoint that they have been taxed on their earnings and savings when generating their wealth and then they are taxed upon death for their success. The UK encourages people to do the right thing, earn, save and accumulate but then tax them on doing the right thing upon their death. However, the other view is that if you have an IHT liability, then you’ve been successful in life and that is something to be proud of.
There are a few facts about IHT that you should know and once you understand IHT and the rulings, you are then in a better position to identify if a liability is present and whether you should address this by contacting a professional who can aid with investigating solutions to mitigate some, or in some cases, all this liability.
Firstly, there are two main forms of IHT relief, the Nil-Rate Band (NRB) and the Residence Nil-Rate Band (RNRB) which allow you to pass a certain value of assets to your beneficiaries without giving rise to any IHT.
NRB = £325,000 and has been fixed for the last 10 years but is expected to rise in line with inflation from April 2021.
RNRB = £175,000 and can only be used on the value of your main residence. If your main residence is valued above £175,000 then the excess value will begin using some of your NRB relief. This relief is subject to ‘tapering’ for estates above £2million and estates above £2.35million will not qualify for this relief.
RNRB is only applicable if your main residence is being inherited by a direct descendant such as your children (including foster, adopted, or stepchildren) or grandchildren, but not nieces or nephews.
Transferral of Relief = The above allowances can be transferred to your surviving spouse if they are not used (i.e. the estate is left to the surviving spouse). When transferring the NRB and RNRB, a percentage is used rather than a monetary figure which would allow the surviving spouse to benefit from additional relief if the allowances were increased in the future. At present, if a spouse were to inherit their late partners NRB and RNRB then their total allowance would be increased to £1million (£350k RNRB + £650k NRB) before giving rise to an IHT liability.
IHT is a dynamic beast and one example of this is that any gifts made within 7 years of death will be classed as a Potentially Exempt Transfer (PET) and will be included within the value of your estate either in full or partially, depending on when the gift was made. This means that if you make a gift of £50,000 to say, a grandchild, then that £50,000 will be included in the value of your estate for IHT purposes (assuming your annual exemption has been utilised by other gifting). However, there is a gifting annual exemption available which can be utilised each year and if the values gifted remain inside these allowances then they will not be including in the value of your estate.
A further ruling which is often overlooked is the Gifts with Reservation Rule which relates to giving away an asset but still benefitting from it as if you were to still own it. If you were to gift an asset away as you believe this will prevent you from having to pay inheritance tax, unfortunately, this is incorrect, and whilst you still benefit from that asset as if you were to still own it, the value of the asset will be including in the calculation when valuing your estate. A common example of this is gifting property to a child but remaining to live there without paying rent at the market rate.
There are many complex rulings and solutions to Estate Planning when investigating ways to mitigate IHT which require specialist advice. There are many solutions to mitigating IHT but only a small number of those solutions may be suitable to your specific case and adopting the correct strategy is important if you wish to attempt to decrease your IHT liability. Products such as Pensions, Trusts, and Business Property Relief Investments are all potential solutions but will require the advice of a professional to assist with designing and implementing an effective strategy.
Here is a case study that I have recently completed for a client who had a £45,000 IHT liability if he was to die at the time of receiving financial advice, but with some strategic planning, we are now actively reducing this and as long as he survives the next 5-6 years, we should have mitigated this liability in full… click this link to find out how this was done.
If you have any queries or believe that you may have an Inheritance Tax liability, then please contact me on 01554 770022 or complete the enquiry form below to arrange a non-obligatory meeting.