Inheritance Tax (IHT), with planning, can be avoided. It is a tax levied on a person's estate when they die and on certain gifts made during an individual's lifetime.
The rate of tax on death is 40% and 20% on lifetime transfers where chargeable. For 2020/21 the first £325,000 chargeable to IHT is at 0% and this is known as the nil rate band.
Residence nil rate band
An additional nil rate band was introduced for deaths on or after 6 April 2017 where an interest in a qualifying residence passes to direct descendants and is £175,000 for 2020/21. For many spouses, the relief is effectively doubled as each individual has a main nil rate band and a residence nil rate band.
Restrictions apply where estates (before reliefs) are in excess of £2 million.
A reduced rate of IHT applies where 10% or more of a deceased’s net estate is left to charity.
IHT on lifetime gifts
Lifetime gifts fall into one of three categories:
The main IHT charge is likely to arise on death and PETs made within seven years become chargeable.
Much estate planning involves making lifetime transfers to utilise exemptions and reliefs or to benefit from a lower rate of tax on lifetime transfers.
Transferable nil rate band
It is possible for spouses to transfer the nil rate band unused on the first death to the surviving spouse for use on the death of the surviving spouse/partner.
An amount of £3,000 per annum may be given by an individual without an IHT charge and can be carried forward, one year only.
Gifts between spouses
Gifts between spouses are generally exempt.
£250 gifts to individuals per tax year per recipient are exempt.
Normal expenditure out of income
Gifts that do not result in a fall in the standard of living of the donor are exempt. Although it is vital that these are made on a regular basis to qualify.
A gift for family maintenance does not give rise to an IHT charge.
Exempt up to £5,000 if made by a parent with lower limits for other donors.
Business property relief (BPR)
When ‘business property’ is transferred there is a percentage reduction in the value of the transfer, up to 100%.
Agricultural property relief (APR)
APR is similar to BPR in that it reduces the value of the transfer. Again the relief can be up to 100%.
Use of trusts
Trusts can provide an effective means of transferring assets out of an estate.
Complexity - is your Will up to date?
Many individuals now have three nil rate bands to consider with a potential total of £1 million. For many individuals, the residence nil rate band will be important but individuals may need to revisit their wills.
This article is an overview only of the main points to consider regarding IHT which can be a very complicated matter. I recommend professional advice is sought when considering your options.
At Thomas Westcott, we are experts at providing advice that can save significant IHT liabilities. Call me to arrange a free meeting on zoom where we can review your options and discuss your plans.
By David Wright, Partner