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It ’ s only natural to want to choose who you pass your assets on to when you die but inheritance tax ( IHT ) can cast a shadow over your plans . IHT planning expert Calvin Healy talks you through the basics and explains how to reduce the amount of tax you pay , so your loved ones benefit rather than HMRC .
IHT is a controversial subject and one which can be divisive , with ideas about its use as a revenue generator for the Treasury often being split along party political lines .
Currently , HMRC ( HM Revenue and Customs ) can claim a whopping 40 % of the value of any estate exceeding £ 325,000 , including property , cash , and assets . And with average house prices in the UK hitting £ 287,782 in October last year , the number of people whose assets are above the threshold are increasing year-on-year .
Fortunately , there are ways to navigating the risk of a huge tax bill eating away at your children ’ s inheritance , but , as with all things tax related , this involves some forward planning .
THE IHT THRESHOLD Top tip number one is stay below the inheritance tax threshold !
Inheritance tax is charged on the value of an estate that exceeds £ 325,000 , an estate being all the assets , property and cash someone owns . So , if your estate is valued at £ 400,000 , the £ 75,000 that lies above the threshold is subject to inheritance tax , charged at 40 %.
If you own your own home , there is an additional allowance of £ 175,000 allowance if you wish to leave this on to your children or grandchildren .
There ’ s no IHT to pay if you pass your home or other assets on to your spouse or civil partner on your death . Both the £ 325,000 allowance and the £ 175,000 allowance can be transferred to the surviving partner , meaning that couples can have a combined threshold of £ 1 million , if all the right conditions are met .
Of course , the conditions are the tricky bit . There are caveats that mean this is not quite straight forward , for instance , the tax-free threshold on your home only applies if it is being passed on to your children or grandchildren and also , your overall estate must be worth less than 2 million .
If you leave the home to another person in your will , it counts towards the total value of the estate .
So how can you keep your estate within these limits ?
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GIVING GIFTS First , gifts can include all sorts of donations , including money , personal goods , property , stocks and shares . Crucially , you must not continue to benefit from the asset you have given away , however .
Giving away your main home for example , could be a great way of reducing the overall value of your estate . HMRC will not , however , consider a home that you gave to a family member but continue living in as a gift . You can remain living in the property , but you will have to pay a standard market rent to the ‘ new ’ owner . The payment of rent can be seen as a way of gradually redistributing some of your wealth and supporting family members prior to your death .
You are also entitled give away a total of £ 3,000 worth of gifts each tax year without them being added to the value of your estate . This can either be given to one person or split among several . You can also use any unused allowance forward to the next tax year .
If a friend or family member gets married there is also a wedding gift allowance , which lets you give the following while escaping inheritance tax :
• £ 5,000 to a child
• £ 2,500 to a grandchild or great-grandchild
• £ 1,000 to any other person .
If you ’ re giving gifts to the same person , you can combine a wedding gift allowance with any other allowance , except for the small gift allowance .
As with everything tax , there ’ s a but and in this case it ’ s quite a big one . Any gift above the level of the gift allowances , including your home , will be subject to the seven years rule , which says that a gift is only tax-free if you survive seven years after the date you gave it . It ’ s a sliding scale , so if tax is payable in respect of the gift , it will reduce over the years . See the table below to see how it works .
YEARS BETWEEN GIFT AND DEATH
3 to 4 years 32 %
4 to 5 years 24 %
4 to 6 years 16 %
6 to 7 years 8 %
7 or more 0 %
RATE OF TAX ON THE GIFT
“ Giving gifts out of surplus income , is a very useful and underutilised relief which if used correctly takes the whole gift outside of inheritance tax ,” Calvin Healy .
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PUT ASSETS INTO A TRUST Another possibility is to set up a trust . This is an agreement where you put some of your assets under supervision of a trustee for the benefit of a beneficiary . If you do that , the relevant assets will not form part of your estate when you die .
Setting up a trust is a big decision , however , as you may not be able to recover your assets if you change your mind . Despite this many see them as a great vehicle to reduce inheritance tax and hold assets ready for an individual when they come of age , for instance .
FAMILY INVESTMENT COMPANY ( FIC ) This is a private limited company , with the shares held by various family members , usually from different generations .
Where you have revenue generating assets , such as rental properties , these can be passed into the ownership of the FIC rather than the individual / s . Once this happens the business income will be subject to corporation tax but will avoid IHT .
A shareholders ’ agreement should set out how the company is run , by whom , plus who will be paid and how .
This arrangement means that you can continue to use and manage your assets , as well as taking income from them , but they will no longer belong to you . They will instead belong to a company , which is owned by the shareholders you decide upon .
Both the FIC and trust options really require expert professional input to ensure they are properly set up to achieve your goals without unforeseen issues arising . Speak to a tax adviser who has had lots of experience dealing with this area .
LEAVE SOMETHING FOR CHARITY Anything you leave to charity will not be touched by inheritance tax . Furthermore , if you leave 10 % of your assets , your inheritance tax will reduce from 40 % to 36 %.
Tax is always a complicated subject , there is a lot more to estate planning than what we ’ ve touched on here . So , if you want to pass on absolutely everything you can when your time comes , make sure to you speak to an expert .
Contact Calvin Healy at Richardson Swift on hello @ richardsonswift . co . uk or by calling 01225 325580 , if you would like help planning your estate .
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