At Continuum Wealth, we guide clients through the intricate details of inheritance tax (IHT), ensuring effective management of estates to optimise tax efficiency and adherence to legal standards. Understanding how to navigate IHT is essential for safeguarding your legacy and minimising the financial burden on your heirs.
Inheritance tax in the UK is charged on an estate when someone dies, as well as on some gifts made during the person's lifetime. The standard IHT rate is 40%, applied to the portion of the estate above the nil-rate band, which is £325,000. If the value is below this threshold, no IHT is due.
The RNRB is an additional threshold for homeowners passing a residence to direct descendants, including children or grandchildren. This is set at £175,000, which can increase the total IHT-free allowance to £500,000 for individuals, or £1 million for married couples or civil partners when combined with the standard nil-rate band.
While the rules for IHT are consistent across England, Scotland, and Wales, Northern Ireland follows the same tax rules as England. It's important to note that while Scotland has distinct legal systems for other taxes, IHT is governed by UK-wide legislation.
In Ireland, the equivalent of IHT is known as Capital Acquisitions Tax (CAT), with different thresholds and a tax rate of 33% on amounts above these thresholds, highlighting the importance of understanding regional tax variations within estate planning.
A properly structured will can direct how your estate is distributed, potentially optimising tax reliefs and exemptions. For instance, assets passed to a spouse or civil partner are typically exempt from IHT, which is crucial for reducing the overall taxable estate.
Trusts and gifts are integral components of strategic estate planning, offering viable ways to manage inheritance tax liabilities efficiently. They not only ensure that your assets are transferred according to your wishes but also help in mitigating the tax impact on your beneficiaries.
Trusts serve as a flexible and secure mechanism for asset management and tax planning. Here’s how different types of trusts can be utilised:
These trusts provide the trustees with the authority to decide how and when the assets are distributed among the beneficiaries. This flexibility allows the trustees to consider the beneficiaries' current tax situations when making distributions, potentially lowering the overall tax burden of the estate.
Beneficiaries of these trusts have the right to the income generated by the trust for their lifetime. For inheritance tax purposes, the value of the trust assets forms part of the beneficiary’s estate, but careful planning can minimise the impact, particularly through the use of specific assets that may qualify for reliefs.
A discounted gift trust (DGT) is particularly useful in estate planning for individuals who require income during their lifetime but wish to reduce their future inheritance tax liability. When setting up a DGT, you make a gift into the trust, which is structured so that you continue to receive regular payments. The value of these payments is calculated at the outset and is discounted from the value of the gift for inheritance tax purposes. This means that the initial gift may fall outside of your estate for IHT purposes immediately, dependent on how long you live following the gift.
Making gifts can be a straightforward method to reduce the value of your estate. If you survive for seven years after making a gift, it becomes exempt from IHT, known as a PET. Regular gifting can significantly reduce the estate size over time, thus reducing the IHT liability.
Each individual has an annual exemption of £3,000 that they can gift without it being added to the value of their estate for IHT purposes. If unused, this exemption can be carried forward one year.
You can make small gifts of up to £250 per person per year to as many people as you like. These small gifts are immediately exempt from IHT, without affecting other exemptions.
Another valuable exemption is for regular gifts made from your income. Such gifts must be part of your normal expenditure and must not reduce your standard of living. These are immediately exempt from IHT.
Using trusts and strategic gifting can significantly influence how an estate is taxed upon death. For example, assets placed in a discretionary trust might be subject to different tax treatment than those transferred directly via a will, potentially benefiting from generation-skipping strategies or tax staggered over time through periodic and exit charges. Additionally, by removing assets from the estate early through gifts, the overall value of the estate is reduced, thus potentially lowering the IHT threshold.
Consider an estate where an individual gifts £150,000 into a discounted gift trust, retaining a right to an annual income. The discounted value of this gift might be calculated at £100,000, reducing the estate's value for IHT purposes by £50,000 immediately. Over time, if the donor survives for more than seven years, the entire £150,000 would be outside the estate for IHT purposes.
By integrating trusts like DGTs and making strategic gifts, you can effectively manage your estate's size and the corresponding tax implications. Continuum Wealth's expert advisers are equipped to guide you through these complex decisions, ensuring that your estate planning aligns with your financial goals and provides for your heirs in the most tax-efficient manner possible.
Business Property Relief is designed to keep family businesses intact by allowing them to pass from one generation to the next without a substantial IHT liability. BPR can reduce the value of relevant business assets for IHT purposes by either 50% or 100%.
To qualify for 100% BPR, the assets must be:
A business or interest in a business.
Shares in an unlisted company.
For 50% relief, the assets include:
Shares controlling more than 50% of the voting rights in a listed company.
Land, buildings, or machinery owned by the deceased and used in a business they were a partner in or controlled.
Certain assets do not qualify for BPR, such as businesses dealing mainly in securities, stocks, or land and buildings. Furthermore, the business must not be subject to a contract for sale at the time of the owner’s death.
Agricultural Relief can reduce the value of agricultural property passed on as part of an estate, which can include land, buildings, and pasture that are used to grow crops or rear animals intensively.
AR is available at either 50% or 100%, depending on the type of ownership and usage of the agricultural property:
100% relief is available on agricultural property which is either owner-occupied or rented out under a tenancy that began after September 1, 1995, provided the deceased had the right to vacant possession or could have obtained it within 12 months.
50% relief applies if the tenancy started before September 1, 1995, and the landlord does not have the right to vacant possession within 12 months.
Properties primarily used for recreation or future development do not qualify. The property must be devoted to agriculture at the time of the owner's death.
Taper relief reduces the amount of IHT payable on gifts made three to seven years before the donor's death. It does not reduce the value of the gift for the calculation of the estate; rather, it reduces the tax rate applied to the gift if the donor dies within seven years of making the gift.
Less than 3 years: No relief, 40% tax rate applies. 3 to 4 years: 20% reduction in tax, 32% tax rate applies. 4 to 5 years: 40% reduction in tax, 24% tax rate applies. 5 to 6 years: 60% reduction in tax, 16% tax rate applies. 6 to 7 years: 80% reduction in tax, 8% tax rate applies. More than 7 years: No IHT payable on the gift.
Effectively using taper relief involves precise timing of gifts and a thorough understanding of how these gifts integrate into the overall estate plan. For substantial gifts, it can significantly lower the overall IHT liability if planned correctly.
By leveraging Business Property Relief, Agricultural Relief, and Taper Relief, estates can minimise their exposure to IHT, ensuring more of the estate passes to the intended beneficiaries while complying with legal requirements. Continuum Wealth offers expert guidance in these areas, helping clients navigate the complexities of tax reliefs to achieve optimal estate planning outcomes.
IHT forms need to be filed, and any due tax paid within six months after the end of the month in which the death occurred to avoid interest charges. If the estate includes property, such as a house or business, tax payments can be spread over ten years.
IHT can be paid from funds within the estate or by the executors using other resources. In some cases, direct payment from accounts held by the deceased, such as pensions or life insurance policies written in trust, can be arranged.
Consider an estate valued at £600,000:
With a nil-rate band of £325,000, the taxable amount is £275,000.
At a rate of 40%, the IHT due would be £110,000, assuming no other reliefs or exemptions apply.
Estates can pay IHT in installments for assets that are not easily sold, such as a business or shares. This allows for more flexibility in managing estate liquidity.
At Continuum Wealth, our approach is to integrate detailed inheritance tax planning within broader financial and estate strategies. Whether addressing how to effectively use allowances and reliefs, or setting up trusts to protect assets and reduce tax liabilities, our expertise ensures comprehensive management tailored to individual needs.
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Note: This page is for information purposes only and should not be considered as financial advice. Always consult an Independent Financial Adviser for personalised financial advice tailored to your individual circumstances.