Tax Planning
It is important to plan for the future and consider whether Inheritance Tax is going to come into play in the event of your death.
Inheritance tax
This is the tax applied on the value of the estate at the date of death. Your estate for IHT purposes is not just your assets in the United Kingdom but all your worldwide assets. In addition, your estate at the date of death also includes the value of any gifts that you have made in the 7 years prior to your death. Currently, the rate of inheritance tax is 40% on the value of the estate above the nil rate sum. The nil rate sum is currently £325,000.
In respect of married couples or civil partners, it is possible to use up on the second death any part of the nil rate sum which was unused on the first death hence in some cases two nil rate sums will be available i.e. £650,000.
Lifetime gifts made by an individual up to the value of £3,000 in each tax year (the annual exemption) are exempt from IHT and are not brought back into your estate for calculating the IHT payable on your death. There are also exemptions for small lifetime gifts (up to £250 to persons who are not beneficiaries of the annual exemption or part of it) and “normal expenditure out of income”. This last exemption exempts gifts made out of excess income (i.e. your capital is not depleted by the gift).
Certain “wedding gifts” (i.e. to a party to a marriage) are also exempt, eg currently £5,000 to a child and £2,500 to a grandchild. Anything left to a spouse on death is exempt from IHT as is anything left to a charity established in the United Kingdom. These exemptions also apply to lifetime gifts.
Residence nil rate band
This additional nil rate band is available for deaths on or after the 6th April 2017 when a residence or interest in a residence is closely inherited by a relative.
The value of the residence nil rate band was £100,000 in tax year 2017/2018, rising by £25,000 each tax year until it reached £175,000 in 2020/2021. It will then increase in line with consumer prices index from tax year 2021/ 2022 onwards.
There are certain conditions which must be met before an estate qualifies for the residence nil rate band. The property must pass to a lineal descendant which would mean a child, stepchildren, foster children, grandchildren or son or daughter in law.
The property must pass to the lineal descendent either absolutely (this means that they receive it as an absolute gift in a will) or they must inherit an immediate post death interest under a trust.
Contact Brearleys Solicitors
We can discuss with you the steps you should or should not take, so as to minimise your tax liability either during your lifetime or after death.
We are specialists in dealing with this type of work, headed by James Shingleton, who can be contacted on 01924 667489 or by email on [email protected]
