Managing Inheritance Tax

Inheritance tax (IHT) is payable on the value of a person’s estate, over and above the nil rate band (£325,000 in 2018/19).  IHT liabilities have been facing an increasing number of people because of rising house prices. Calculating and paying it can be tricky and add another layer of worry to what may already be a stressful and emotionally difficult time. For more information about IHT take a look at our factsheet.

If you think you might have an IHT liability when you die, you should consider seeking professional tax advice, particularly if your estate is likely to be well above the nil rate band or is very complex, because the rules around IHT are pretty complicated. It’s also worth considering whether taking some fairly simple steps now that could reduce your IHT liability later on. Here’s a summary of some of the more simple options to consider.

  1. Gifting money to children or other family members
    You may make gifts to children and family of however much you wish. But unless they fall under one or more of the categories described below, to ensure that these gifts don’t form part of your estate and remain tax-free, you must live for 7 years from the date of the gift. If you die before the 7 years are up the gift becomes a potentially exempt transfer (PET) and your estate may have to pay some IHT (see our factsheet for more details on PETs). Be careful though because some types of gift might create an Income Tax or Capital Gains Tax liability for the recipients. If you’re going to make gifts to reduce your IHT liability you must make and keep a clear record of what you gave, who you gave it to, when you gave it and how much it is worth. 

  2. Gifting to charity
    You can give as much as you want to charity as often as you want without incurring IHT. There may also be relief available on other kinds of tax such as Income Tax in doing so.  If 10% or more of the ‘net value’ of your estate is given to charity the rate of IHT on some of your assets may be reduced from 40% to 36%.

  3. Annual gift allowance
    Everybody has an annual ‘gift allowance’ of £3,000. You can give away assets or cash up to this amount each year without any IHT liability. You can carry over any unused gift allowance to the following tax year up to a maximum of £6,000. But if you do so you must use up all your allowance in that tax year.

  4. Other gifts you can make tax-free

    • Gifts that are worth less than £250 (provided they are not given to someone who’s already received a gift of your whole £3,000 annual exemption).

    • Wedding gifts – to reduce your IHT liability they must be given before the wedding and:

      • Given to a child and worth £5,000 or less

      • Given to a grandchild or great-grandchild and worth £2,500 or less, or

      • Given to another relative or friend and worth £1,000 or less

    • Gifts to help with living costs of an ex-spouse, elderly dependent or child under 18 in full-time education are exempt.

  5. Gifts from surplus income

  • The rules for this exemption are complex and the payments must be regular.

  • You must be sure you can afford to do so and you must be committed to keeping up these regular gifts.

  • Examples of such regular gifts could be:

    • Regular payments into your child’s savings account

    • Paying a life insurance premium for your spouse or civil partner.

    • Regular could mean annually so it could be used to make birthday gifts

Tax affairs can be quite complex and some of the rules around IHT exemption are especially so. It is worth considering seeking advice from a legal or estate tax adviser before taking any action, particularly where your affairs are complicated or large sums are involved.

The Financial Conduct Authority does not regulate tax advice.

Sources:
https://www.moneyadviceservice.org.uk/en/articles/a-guide-to-inheritance-tax
https://www.moneyadviceservice.org.uk/en/articles/gifts-and-exemptions-from-inheritance-tax
A practical guide to advising older clients about estate planning, SOLLA, January 2018.
 

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