It is vitally important to use all ways possible to save the payment of inheritance tax when you die. Although you will not have to pay the tax yourself, your beneficiaries will and it will make the administration of your estate more complicated for everyone involved.
There are still plenty of circumstances where Trust Wills can be used effectively for Tax savings and other important reasons.
The introduction of the ‘Residence Nil Rate Band’, from April 2017, gives further scope for tax planning through wills.
At Cheyney Goulding, we know that every individual’s circumstances are different and that is why we take care to listen carefully to what you want to achieve and advise you fully on all the options available to you.
When is IHT charged?
IHT is primarily a charge on your assets on death, including your share of assets jointly held with another person. Lifetime gifts made within seven years prior to your death can also impact the tax payable.
IHT 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, gifting your house but still living in it.
It is also charged on lifetime gifts to companies and to certain types of trust and these trusts also suffer periodic IHT charges.
Who is liable to IHT?
If you have lived in the UK all your life, IHT applies to your worldwide assets.
What is the rate of tax?
The nil rate band (see below) is charged at 0%.
The balance is charged at:
20% for lifetime gifts to companies or to relevant property trusts (with further tax due if the donor dies within seven years).
40% on estates on death.
The rate of IHT on death can be reduced for individuals who leave 10% or more of their net estate to charity.
Nil rate band and residence nil rate band
The nil rate band and residence nil rate band are amounts which are chargeable to IHT at 0%. The basic nil rate band is currently £325,000. There is also an extra nil rate band (called the residence nil rate band) of between £100,000 and £175,000 (depending on the year of death) if the family home is inherited by children or grandchildren.
If you are married, your surviving spouse, or civil partner can “inherit” the unused portion of your nil rate band or residence nil rate band.
Exemptions available for lifetime gifts and on death
Certain gifts are exempt from IHT and do not use up your nil rate band. Briefly, the main exemptions are as follows:
Gifts to your spouse, same sex spouse or civil partner, opposite sex civil partner.
Gifts to charities established in the UK, any other EU country, Norway or Iceland.
Exemptions available for lifetime gifts only
Additional exemptions are also sometimes available for lifetime gifts.
Reliefs available for lifetime gifts and on death
If the gift is of a special type of asset and the necessary conditions are met, relief may apply to reduce the amount of IHT payable, sometimes to nil. The main reliefs are:
Agricultural property relief and Business property relief
IHT is chargeable on individuals who are domiciled in the UK, or those who have UK assets.
Individuals who are domiciled in the UK are subject to IHT on their worldwide assets. From 6 April 2017, individuals who have been UK resident for more than 15 out of the last 20 tax years will be deemed to be UK domiciled for all tax purposes.
Individuals who are not domiciled in the UK are subject to IHT on their UK assets only.
Can I use a Will to save tax?
As has been seen above, any gifts to charity or to surviving spouses or civil partners are free of tax. Also, every individual has their own nil rate band threshold. In addition, certain assets (business and farming assets for example) attract reliefs from tax.
It does not make sense for assets or amounts that would not produce a tax bill to be given to beneficiaries who are tax-exempt beneficiaries. For example, if business assets are given to a surviving spouse, two tax reliefs apply and so one is wasted.
It would be better for assets that attract tax relief to be given to beneficiaries who do not. The correct wording in a Will can arrange this. However, you may want your spouse to inherit your business for example and so advice needs to be taken as to how you can arrange this whilst still making best use of all the tax reliefs available.
Can I use Trust and Lifetime planning to save tax?
Yes, we can show you various ways to reduce IHT for your family, including Lifetime Trust planning.