Estate and inheritance tax (IHT) planning
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Introduction
Looking ahead towards estate planning and mitigating inheritance tax (IHT) is key to managing and protecting your wealth, for you and your family. A large proportion of your wealth might be subject to inheritance tax when you die, at up to 40%. This includes assets such as properties, investments, and even old family heirlooms. Careful IHT planning is all about passing as much of your estate as possible to who you want to receive it, and reducing the inheritance tax liability payable. It’s also about maintaining flexibility and control over any arrangements that are made.
The majority of your assets will be subject to IHT if, when you die, the value of those assets exceeds the standard nil-rate band which currently stands at £325,000. If your spouse dies before you without fully using their nil-rate band, any unused percentage can be carried forward to use when you die, subject to a claim being made by your executors within two years of your death.
With the family home often making up a large percentage of an estate, the government has introduced an additional nil-rate band on top of the £325,000, known as the ‘residence nil-rate band’. The current residence nil-rate band is up to £175,000.
This means that if you give away a home that you have lived in as your main home to your children (including adopted, foster or stepchildren) or grandchildren, they won’t have to pay IHT on the first £500,000 (£325,000 nil rate band + £175,000 residence nil-rate band).
If you are a married couple or in a civil partnership then you can combine both your nil-rate bands, meaning that the first £1 million of your assets, including your property, are free from IHT.
The value of all assets in excess of the nil-rate band and the residence nil-rate band will be taxed at up to 40% – paid for by your estate.
Pensions are, incidentally, not usually included in the value of your estate so IHT is not normally charged on their value.
However, when the value of an estate exceeds £2 million, the residence nil-rate band is tapered, by £1 for every £2 above this level. You need to consider the value of the estate on each respective death.
The levels and bases of taxation and reliefs from taxation can change at any time. Tax relief is generally dependent on individual circumstances.
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Should you be worried about how Inheritance Tax (IHT) could impact your estate and the wealth you wish to transfer, incorporating a Gift Plan into your wealth management approach might serve as an excellent solution. Our Gift Plan combines an investment bond (either onshore or offshore), with either an absolute or discretionary trust which is controlled by you and benefits those who you want it to.
Assets held within a discretionary trust do not become part of the beneficiary’s estate as long as they remain in the Trust. This plan is versatile, serving various purposes including maximizing exemptions from Inheritance Tax (IHT) or covering educational expenses.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.
The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.
Trusts are not regulated by the Financial Conduct Authority.
A Trust ensures that the correct funds are delivered to the right people at the appropriate moment, offering flexibility, innovation, and control that may not be possible with a Will alone.
It’s understandable to assume that estate planning primarily concerns the distribution of your assets posthumously. However, its scope extends beyond that, encompassing the current organisation of your wealth to enhance its utility, whether for protecting your loved ones or reducing tax implications.
Trusts are not regulated by the Financial Conduct Authority.
Over and above gifting sufficient assets to reduce your gross estate value to within £2 million, if you have excess income during your retirement, it might make sense to consider a life cover plan written in trust, to meet the eventual IHT liability, which could be as high as £400,000 on an estate valued at £2 million.
It is important that the life cover plan is written into trust, and that the premiums are paid using excess income, rather than from assets – otherwise, the premiums paid could be treated as a chargeable lifetime transfer (CLT).
Note that probate is required to release estate assets, whereas IHT needs to be paid before probate is granted. By placing a life policy in trust the sum assured will be paid into trust and can be used to meet some/all of the IHT liability. This means the executors will not necessarily need to realise the sale of other assets, such as property and investments, in order to meet the said liability – particularly advantageous if markets are underperforming at the point in time that the sale of assets otherwise needs to be realised.
The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.
Trusts are not regulated by the Financial Conduct Authority.
Typically, a trading business is eligible for 100% Business Relief from Inheritance Tax (IHT), allowing it to be transferred to heirs without incurring IHT upon the owner’s demise.
The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.
A husband died five years ago, having left all of his assets to his wife. He had not made any gifts in his lifetime. His estate was worth below £2 million.
When his wife dies, her estate includes a property worth £1.2 million, and various other assets such as savings amounting to £1.1 million;
Gross estate value £2,300,000
Less 2x nil-rate band -£650,000
Less 2x residence NRB -£350,000 – £150,000 (Tapering: £300,000/2 = £150,000) = -£200,000 tapered RNRB
Net estate £1,450,000
IHT due at 40% £580,000
If the couple were able to reduce the gross value of their estate to under £2 million (for example by gifting sufficient assets more than seven years before their deaths), thus restoring their full residence nil-rate bands, the calculation would be as follows;
Gross estate value £2,000,000
Less 2x nil-rate band -£650,000
Less 2x residence NRB -£350,000
Net estate £1,000,000
IHT due at 40% £400,000
Gifts that are not covered by any of the available exemptions may be taxable where death occurs within seven years if they exceed the available nil-rate band. Inheritance Tax (IHT) payable on those failed gifts may be reduced in the form of taper relief. Taper relief operates by reducing the amount of tax payable not the amount of the gift.
The amount of the taper relief depends on the length of time by which the deceased survived the transfer. If death occurs within 3 years of the gift, then no tapering applies. From year 3 onwards, the tax charge is reduced by 20% for each complete year after the gift is made.
The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.
