Inheritance Tax Planning

It may seem strange to talk about planning for Inheritance Tax. Perhaps we should call this Inheritance Tax Avoidance Planning! However, whichever way you choose to describe it, its purpose is to minimise the exposure of your estate to Inheritance Tax.

What is Inheritance Tax?

Inheritance Tax (IHT) is a tax your estate pays to the UK Government based on its value. In plain terms, if your estate is worth more than the IHT threshold (currently £325,000) IHT will be due on the balance of your estate above that figure at a rate of 40%. You cannot apply for Confirmation in Scotland on an estate worth more than the IHT threshold unless the IHT has been paid. Those who are dealing with the administration of the estate need to calculate and pay the tax before the estate can be ingathered and distributed.

There are certain exemptions that are available. Some of these are automatic whilst others require your executor to claim them.

For instance, there is no IHT between spouses. That means if you leave everything to your wife or civil partner (but not a partner you are cohabiting with but not married to or in a civil partnership with), there is no IHT payable.

Also, if you are a surviving spouse or civil partner and your deceased spouse or civil partner’s estate did not use up their full allowance, any balance of their allowance can be added to your IHT allowance before any IHT becomes payable.

Furthermore, there is an additional allowance of £175,000 available when you leave your home to a child, grandchild, or a close relative (restrictions apply).

Apart from the exemptions, what other options do you have?

Whilst the exemptions are part of your entitlement, you need to make sure you use your full allowance and carry out the calculations. However, those exemptions apply after you’ve died. To carry out effective Inheritance Tax planning, you need to work out the potential IHT impact and then take steps now to mitigate its effect.

What are my mitigation options?

If you gift property or assets to someone (but do not retain any interest in the gift), if you survive for seven years after making the gift, no IHT is payable on the value of the gift. If you die within the seven-year period, depending on when that happens, there may be a reduced rate of IHT payable.

In addition, there are several other gift options you can use annually to reduce the likely level of your estate. These include annual gifts of up to £3,000 in each tax year, regular payments out of income, wedding gifts, as many small gifts of up to £250 each year and gifts to charities.

Inheritance Tax planning takes time and can be complex. To take advantage of the options available to you, plan early, review often and do not leave everything to chance. Death can come unexpectedly, so it is best to be prepared.