Inheritance Tax (IHT) Planning

Speculation that the government will tighten up the rules surrounding IHT has so far proved to be wrong.

IHT is charged on a person’s estate when they die and on certain gifts made during their lifetime.

The rate of tax on death is 40% and 20% on lifetime chargeable transfers. The first £275,000 is not chargeable.

Most gifts made more than seven years before death will escape tax. Therefore, if you plan in advance, gifts can be made tax-free; the result can be a substantial tax saving.

This section of the bulletin gives guidance on some of the main opportunities for minimising the impact of the tax.

Estate planning

Much estate planning involves making lifetime gifts of capital to use exemptions and reliefs or to benefit from a lower rate of tax on lifetime transfers.

Any plan must take account of your circumstances and aspirations. The need to ensure your financial security (and your family’s) cannot be ignored. If you propose to make gifts, the interaction of IHT with other taxes needs to be considered carefully.

If you do nothing you may become exposed to a large IHT liability. There are straightforward cases where just one extra sentence in your Will could save £110,000 of tax.

Wills

As the main IHT liability is likely to arise on death, a sensible and up to date Will is important.

Exemptions

There are many valuable IHT exemptions. The main ones follow. Ensure you’re making full use of them!

Annual exemption
£3,000 per tax year may be given by an individual without an IHT charge. An annual exemption may be carried forward to the next year but not thereafter.

Small gifts
Gifts to individuals not exceeding £250 in total per tax year per recipient are exempt.

Normal expenditure out of income
Gifts made out of income which are typical and habitual and do not result in a fall in the standard of living of the donor are exempt. Payments under a deed of covenant and the payment of annual premiums on life insurance policies would usually fall within this exemption.

Family maintenance
A gift for family maintenance does not give rise to an IHT charge. This would include the transfer of property made on divorce under a court order, gifts for the education of children or maintenance of a dependent relative.

Wedding presents
Gifts in consideration of marriage are exempt up to £5,000 if made by a parent with lower limits for other donors.

Gifts to charities
Gifts to registered charities are exempt provided that the gift becomes the property of the charity or is held for charitable purposes.

Reliefs
When business or agricultural property is transferred there is a percentage reduction in the value of the transfer. Often this provides 100% relief. In cases where full relief is available there is little incentive, from a tax point of view, to make lifetime transfers of such assets. Additionally no CGT will be payable where the asset is included in the estate on death. However the reliefs may not be so generous in the future and therefore gifts now may be advisable.

What will happen to any business or agricultural property included in your estate on death? Leaving it to your spouse will waste any available relief. Consider leaving such property to someone else.

Life assurance

Life assurance arrangements can be used as a means of removing value from an estate and also as a method of funding IHT liabilities.

A policy can also be arranged to cover IHT due on death. It is particularly useful in providing funds to meet an IHT liability where the assets are not easily realised, eg family company shares.