When considering your inheritance tax position, you want to be sure you’re passing the maximum amount possible to the beneficiaries of your Estate. As the country is in economic downturn due to Covid-19, it is more important than ever to maximise reliefs now.
This blog will cover some simple tax planning steps to help you reduce the Inheritance Tax payable on your Estate. Whether you’re the executor of the Estate, or a family trying to navigate Inheritance Tax (IHT) yourself, these tips will help.
1. When disposing of any shares at a loss, make sure fall in value relief is claimed
What is Fall in Value Relief? When Executors of an Estate sell shares during the period of administration at a lower value than what they were valued at the date of death, you may be able to claim fall in value relief. This reduces the value of these investments in the IHT account to the value they were sold at, so you pay less Inheritance Tax. Restrictions do apply however, if you then sell some shareholdings at a profit. Fall in value relief is only available on disposals made in the first 12 months of the period of administration.
Maximise this relief by only selling loss-making shares, and appropriating out profitable shares to beneficiaries where possible so that this valuable relief isn’t restricted.
Similar considerations also need to be given to any properties that are within the Estate. Often fall in value relief can be maximised and the Estate’s Capital Gains Tax liability minimised by undertaking Capital Gains Tax planning for the Estate at the start of the period of administration – before any decisions to sell have been made. A longer period applies to the disposal of property than with shares.
2. If a beneficiary’s inheritance is surplus to their requirements, you may be able to pass this on to your children and grandchildren.
If you inherit assets and then gift them to other members of your family, this starts the clock ticking for 7 years on this potentially exempt transfer. Meaning for 7 years the asset may still fall within your Estate and be subject to Inheritance Tax.
You should consider the use of deeds of variation to pass some inheritance onto younger generations, meaning that any gifts you intended to make are immediately outside your Estate and the 7 year rule does not apply.
What are Deeds of Variation? Deeds of Variation refers to a document that allows the beneficiaries named in the Will to change the direction of any assets they inherit from the Estate. It allows you to skip out on your inheritance and let it go to the person you want to pass it to.
3. Ensure the Estate utilises its Capital Gains Tax annual exemptions in the year of death and 2 tax years after.
Executors only get Capital Gains Tax exemptions for the year of death and 2 years after. Using this year (2020) as an example, that’s £12,300 in each year that you can deduct from your gains and save tax.
However, if Executors sold an asset in the fourth year, the Estate wouldn’t be getting that £12,300 deduction. If the Estate hangs on to their assets because it takes you a long time to organise sales, and then have all the sales in your fourth year – you will have wasted 3 x £12,300 at a maximum of 28% – resulting in potential extra tax in excess of £10,000.
We advise you to plan your capital gains tax disposals where possible.
4. Timing of income and capital distributions for beneficiaries may be relevant if they are entitled to any means tested benefits during the covid pandemic
An Estate pays income tax on the income received during the period of administration. When an income distribution is made to a beneficiary, it is taxed on them at their marginal rate of tax. A large income distribution in one year could impact your entitlement to means tested benefits.
Additionally, if you’re a higher rate tax payer in one year and a basic rate tax payer the next, it’d be really good to time that distribution so you receive the income in the tax year when you will be subject to basic rate tax, even if it means waiting a couple of months till the next tax year. You’ll have less tax to pay the next year, so you’re not suffering additional tax.
Finally a point to consider for people who are currently undertaking planning and thinking of making a charitable donation in their will:
In the current economic downturn, charities are seeing a reduction in donations. If you plan on including a donation to a charity within your will, it is worth considering the level of distribution to be made. As well as giving a benefit to the charity, it may also benefit the beneficiaries of your Estate. If you give 10% of your net Estate (gross Estate less the current nil rate band), your Estate will benefit from the lower rate of Inheritance Tax at 36%.
Where sizeable charitable donations are already being considered this can often result in a larger distribution to your other beneficiaries because of the reduced rate of IHT.
Do not fear Executors! If you are dealing with an Estate that has made charitable donations but they are not quite enough to meet the threshold for the reduced rate of IHT, it is possible to complete a Charitable Deed of variation to sort this out. It is always worth checking whether this would be beneficial where charitable donations are already being made in the will.
If you’re in the process of dealing with an Estate, let us help you with tax advice
We find families who choose to deal with Inheritance Tax themselves without advice often aren’t maximising the amount that’s available to be distributed to the beneficiaries. Whether you’re the executor of the Estate, or a family going it alone, we want to make sure that’s not the case.
We have a team of IHT specialists on hand to help you digest the complicated rules, and get the best from your situation. Get in touch for a chat with Alex and Pauline.
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