Do Something Now Because Later Might Be Too Late….

Recent figures from HMRC revealed that in the financial year from April 2021 to March 2022, £6.1 billion was paid to the Treasury in Inheritance Tax …… £700 million more than in the previous year!

Sadly, one of the main contributing factors was the sudden increase in the number of deaths from Covid19. However, it is also due to rising property prices, which increase the overall value of estates, resulting in them being in excess of the Inheritance Tax threshold available; and a consequence of many families failing to plan early enough.

Inheritance Tax is primarily a charge on your assets on death, including your share of assets held jointly with another person. (Lifetime gifts that were made within the seven years prior to your death can also be brought back into charge).

Inheritance Tax is also charged where an asset appears to have been given away, but where you in fact retain the use of (or a significant benefit in) the asset given. For example, if you give your home (in which you continue to live) to your children and do not pay them a full market rent for your occupation.

If the estate is valued at above the Inheritance Tax nil-rate band, which is currently £325,000, then the excess will be liable for Inheritance Tax at a rate of 40% – although this rate is reduced to 36% if 10% or more of the net estate is left to charity.

In April 2017, an additional Inheritance Tax allowance was introduced called the ‘residence nil-rate band’. To qualify for this allowance you must pass on your main residence, or the sale proceeds of your former residence, to your children (including adopted, foster or stepchildren) or grandchildren when you die.

The maximum residence nil-rate band currently available is £175,000 meaning that your individual Inheritance Tax allowance could increase to £500,000. The residence nil-rate band is tapered by £1 for every £2 that your estate exceeds £2m. As a result, the additional allowance will not be available if the estate’s assets exceed £2.35million.

The good news is that there are ways to reduce the Inheritance Tax that may be payable upon your death with careful lifetime planning.

You can give away as much money or assets to your spouse or civil partner as you wish without incurring any Inheritance Tax before or upon death. The surviving spouse or civil partner can then ‘inherit’ your unused portion of your nil rate band, as long as it wasn’t used upon the first death.  This means that there would potentially be a total nil rate band allowance of £1m available for the surviving spouse or civil partner.

But you don’t have to wait until you die to pass on your wealth. One of the best ways to reduce the size of your estate for Inheritance tax purposes is to make gifts from excess income. There is no limit on the amount of money that can be gifted from your income and you do not have to survive 7 years in order for the sum to pass tax free to your chosen beneficiary. There are certain criteria that needs to be met to maximise the chances of obtaining this exemption so please ensure that you obtain professional advice.

There are also other tax efficient gifts that you can make from your capital: –

Each year you can give gifts for weddings or civil partnerships of up to £5000 to your own child, £2500 to a grandchild or great grandchild, or £1000 to any other person.

Small gifts of up to £250 per person can be given each tax year so long as you haven’t used up another allowance on the same person.

You also have an annual tax-free allowance of up to £3000 to give cash or assets to anyone you want. Any unused allowance from the previous tax year can be carried forward one year, but no further, so there is a £6000 limit in total in any given year.

Outright gifts of any amount become fully exempt from Inheritance Tax if you survive for seven years.

We all work hard during our lifetime to provide for our families and ourselves. What a shame it would be if upon your death all your family are left with is a hefty tax bill which could potentially have been avoided with proper planning.

Plan for the future, ensure that you have an up-to-date Will and that your Will is drafted in such a way that you do not lose out on the nil-rate band or the residence nil-rate band, and speak to a Specialist Solicitor to get the best advice for your circumstances.