Make your wealth more efficient
In 2018/19, only 3.7% of deaths in the UK gave rise to an Inheritance Tax (IHT) charge. Indeed, as a private client lawyer, I have taken great joy in telling clients that their estates are unlikely to be subject to this most hated tax – but such occasions are becoming increasingly rare.
HMRC collected £6.054 billion in IHT revenue in 2021/22 and revenue is expected to reach £8.3 billion by 2026, capturing over 200,000 people over the next four years.
The IHT rescuers did not catch up rising real estate prices even with the introduction of the Residence Nil Rate Band (RNRB). It is a convoluted and convoluted relief which nevertheless, together with the Nil Rate Band (NRB), lifts an estate worth less than £1million off the IHT net for a married couple. It has of course been unnecessary that the NRB has been frozen since 2009 at £325,000.
So how can you avoid paying the IHT as the net gets wider and wider?
The answer is forward planning. It’s never too early to think about how to make your estate more tax-efficient.
Reduce your wealth through donations
An outright gift is one of the easiest ways to reduce an estate, for example, giving an adult child or grandchild a deposit for a house.
These donations are potentially exempt transfers (known as PET) and therefore may be charged to IHT if you die within seven years of the donation. This is called the “seven-year clock”.
On donations, each person can give £3,000 a year, which is immediately exempt and not on the seven-year clock.
You can carry over the allowance for a year if it has not been used. You can also donate up to £250 to an unlimited number of people each year.
It is also possible to make regular donations from income that is immediately exempt from IHT, although it is important to keep meticulous records to help your executors claim this relief.
If you want to donate money or assets but still want to retain some control, a transfer into a trust may be more appropriate, although there are limits to the amount that can be placed in trust before a tax charge does not arise.
There are other structures that can also be useful. If you have a large amount of cash available, a family investment company may be an appropriate vehicle, for example.
It is important to consider the capital gains tax implications of any donation.
Make use of waivers
Transfers between married couples and civil partners, both living and upon death, are exempt from IHT due to the spousal exemption (with some rare exceptions).
Contrary to popular belief, there is no exemption from IHT between unmarried couples, so if you are not married to your partner or in a civil partnership with him, your estate may be subject to IHT when you will bequeath your estate to him and it will not be possible to transfer your NRB or RNRB to them so that they can use it upon their death.
Each person has an NRB of £325,000 which can be passed on without IHT on death. This can be reduced by donations and in-trust transfers caught up by the seven-year clock.
For those who pass assets to direct descendants on death, an additional exempt amount of £175,000 is available (the RNRB).
Both allowances are transferable between married couples, so if a person leaves their estate to their spouse or civil partner, these allowances will not be used due to the spousal exemption, but can then be used on the second death.
This means that up to £1million can be passed on to married couples without IHT if all four allowances are fully available. Although the RNRB is only fully available for estates worth less than £2 million, steps can be taken to bring the estate below this threshold.
Other exceptions that may be much more useful include exemptions on commercial property (Business Relief) and agricultural property (Agricultural Relief).
Certain business assets are exempt from IHT at a rate of 100%, allowing a business to be passed between generations without having to sell assets to fund an IHT bill. These assets need only have been held for two years prior to death.
Make sure your Will is tax efficient
Not all wills will help save IHT, but having a Will be drafted by a lawyer will ensure that the IHT implications of the will structure are properly considered and dovetail perfectly with the lifetime estate planning you have in place.
For example, a lawyer can advise you on the most tax-efficient way to support an unmarried partner or how to preserve business assistance that would otherwise be lost if the entire estate was left to a spouse or civil partner.
Of course, not every decision you make about your Will is tax-driven, and it’s more important that your Will ensure that your estate is given to those you wish to benefit, but a lawyer can ensure that this is done in the most tax efficient way. way.
Other development measures
It is also possible to reduce your IHT exposure on assets that you may not have even considered. For example, naming a trust to receive your in-service death benefits from your employer or placing your life insurance policy in trust may avoid inflating the estate of your spouse, civil partner, or partner for IHT purposes, but funds remain entirely at their disposal if they are needed.
Another underused measure is the use of deeds of alteration upon receipt of an inheritance. If you already have an estate that may be subject to IHT, it is a good idea to remove the inheritance from your estate for IHT purposes.
However, if you use an amending deed to create a discretionary trust, you will still be able to benefit from the inheritance in the future.
If you are concerned that your estate may be subject to IHT upon your death or the death of your partner, it is important to seek legal advice to reduce your estate’s exposure to this tax.
If you already have a financial advisor or accountant, a lawyer can work with your current advisors to ensure your estate is tax efficient.
Sarah Nettleship is an attorney at Thomson Snell & Passmore