Paying taxes are necessary to ensure public services continue to run. While we don't advocate tax avoidance schemes, did you know that you can limit your inheritance tax liability? When you pay taxes all of your working life, do you want the inheritance you leave your family to be subject to larger than necessary taxes.
When trying to limit your inheritance tax liability there are some simple, but often overlooked, exemptions that you should consider. At the moment, the inheritance tax nil-rate band is £325,000. An estate that exceeds this is liable to inheritance tax at 40% on the excess value (subject to a new allowance for residential property that passes to direct descendants). Your estate includes everything that you own at the date of your death and the value of any gifts made within the preceding seven years of the date of your death.
Inheritance tax planning needs to consider your present needs and position to ensure that you have sufficient funds to live off and to cover any possible future needs. So what exemptions can you use?
Potentially exempt transfers
You can give a gift of any amount to others and, providing you survive for the subsequent seven years, these gifts will fall outside of the value of your estate for inheritance tax purposes. However, if you die within seven years of making these gifts, their amounts will form part of your estate for inheritance tax purposes (although the person will not have to repay the gift). In the event that you make a gift that takes your estate over the nil-rate band, the excess will be liable to inheritance tax and will be payable by the people who received the gifts. You may wish to consider small gifts taking you up to the nil-rate band in the hope of surviving for at least seven years. If you're married, both you and your spouse has a nil-rate band for inheritance tax and can make 'potentially exempt transfers'.
If you are contemplating making significant gifts, we recommend that you contact us for legal advice beforehand to ensure that the position of your estate and the recipients of any gifts are protected.
Anyone can give away £3,000 per year under the annual exemption rules; the money can be given to one person or split between multiple people. This is a once a year exemption and you may wish to consider utilising it on a regular basis. However, it can't be used in conjunction with the small gifts exemption mentioned below.
If you haven't made gifts along these lines previously, for the 2017/2018 tax year, you could give away £6,000 or under by rolling forward the unused exemption for the 2016/2017 tax year. You can only do this for the immediately-preceding tax year.
Small gifts exemption
You can make one-off gifts of £250 to as many people as you'd like. This means that you could make annual gifts of, for example, £250 to each of your grandchildren, or other friends or wider family members that you wish to benefit. You are unable to give someone £250 who has also been the recipient of all or some part of the £3,000 annual exemption mentioned above.
Out of normal income expenditure
A potentially valuable inheritance tax exemption is gifts out of normal income. If your income is more than sufficient to meet your present needs any excess income can be gifted to others. Excess income is what would otherwise be added to your savings and increase your available capital wealth. However, it is important that you don't reduce your standard of living to increase your available disposable income for this purpose.
To claim this exemption you will need to complete detailed records. To make things easier, you may wish to obtain a copy of the HM Revenue and Customs form and start keeping a record of your usual expenses in terms of running your family home, food bill, etc., as well as details of your income. Keeping records now will make it easier for your executors in submitting this form and be of enormous assistance in the smooth administration of your estate.
Other options in relation to inheritance tax
It is important that you don't let inheritance tax planning unduly affect your day-to-day life, but there are additional options you can consider. There are various investments that qualify for relief from inheritance tax, such as an enterprise investment scheme or an alternative investment market portfolio. Generally, such investments qualify for 'business property relief' if they have been held for over two years. We are not financial advisers and cannot advise as to the options around investments, but we can put you in touch with a financial adviser for you to discuss matters with if this is of interest to you and suits your circumstances. There are also options around potentially seeking insurance to pay your inheritance tax liability.
Need more information around planning your estate's tax efficiently? Or want to ask us a question?
We'll be delighted to talk to you. Call us on 0121 214 3671 or email firstname.lastname@example.org for a free, no-obligation, 20-minute consultation with one of our team, quoting 'ready for anything'.
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