Inheritance Tax - Ignore at your Peril!

It’s time to consider your inheritance tax position, Calvin Healy from Richardson Swift writes.

With the nil rate band for inheritance tax purposes potentially remaining frozen at £325,000 until 2017/2018, it’s important that you take the time to consider your inheritance tax position.

This is not only of importance to people in their later years but also to children, who are the ones who could be left to fund any inheritance tax bill. In addition everybody needs to consider planning ahead in order to secure the inheritances of future generations.

The starting point for any planning is to either make or review your will in order to ensure that your wishes will be carried out when you are not around, as well as arranging your affairs as tax efficiently as possible. We work closely and in tandem with local solicitors who can assist in this area.

On top of this there are a wide variety of planning opportunities available ranging from the very simple to the complex. Here are a few:

Making use of available exemptions

The most straightforward and simple way to mitigate any potential future inheritance tax liabilities is to make use of available exemptions. The following are examples of gifts which can be made free of inheritance tax:

Small gifts to the same person up to £250 in any tax year. These can be made to as many people as you wish.
Gifts in consideration of marriage or civil partnership. The exemption limits are £5,000 made by a parent, £2,500 by a grandparent, £1,000 by anyone else.
The first £3,000 of gifts made in any tax year. This is known as the annual allowance and there is an added element in that any unused allowance from the previous tax year can be added to your allowance for the current year resulting in a £6,000 exemption.
Gifts for the national purpose; for example to the National Gallery, British Museum, and or National Trust to name a few.

Make gifts out of surplus income

Gifts out of income can be made free of inheritance tax. In order to qualify the gift must be part of your normal expenditure and, taking one year with another, be made out of surplus income so that your current standard of living is maintained. Records should be kept in order to support a claim for the exemption.

Gifts to charities

Gifts to charities are exempt from inheritance tax, but in addition if you give away 10% of your net estate (sum of all assets after deducting debts, liabilities, reliefs, exemptions and the nil rate band) to charity then the rate of inheritance tax that applies to the remaining estate drops to 36%. Some people make gifts to charities under their will so it is well worth reviewing the amounts considered.

Investing in assets which qualify for business property relief

Business property relief is available on the value of any holding of unquoted shares provided that the company qualifies as “trading” for these purposes. This includes shares which are held on the Alternative Investment Market (AIM). Relief of 100% of the value of shares can be obtained once they have been owned for over two years.

The relief also applies in principle to your own business (sole trader, partnership, unquoted trading company) although detailed conditions apply.

Use of trusts

The use of trusts can be a useful way of mitigating inheritance tax but the main driving force is primarily asset protection and control. It is possible to settle assets of up to £325,000 into trust without incurring an immediate charge to inheritance tax which then after seven years falls out of account altogether. Once established the trust itself will have its own inheritance tax as well as other tax implications which would have to be borne in mind when undertaking planning.

Use of bespoke strategies

There are also other more creative strategies which can be used in order to plan effectively for inheritance tax purposes. For example, it can be possible to make use of the family home as part of an inheritance tax planning exercise which does not necessarily mean you have to give up living in it.

There are further areas of consideration, such as pensions (where the tax charges upon death are set to change) and life insurance, so taking advice sooner rather than later is essential.

Of course your personal situation will need to be factored into any equation so that adequate provision is met for your own needs during your lifetime.

The guidance given herewith is for general use and is made with consideration to current law and prevailing best practice. It is essential that specific advice be sought before undertaking any tax planning activity. For further information please contact either Calvin Healy or Jon Miles.