The huge increases in house prices over recent decades has been one of the main reasons why inheritance tax has started to hit more and more ordinary people.
Understanding Inheritance tax and how you may be affected by it, is vital. If you begin planning for it now, you avoid passing a tax bill onto your loved ones when you’ve passed.
Firstly, it’s important for us to be clear about who, generally, inheritance tax (IHT) applies to. If you were born overseas, it’s possible you may have a non-UK domicile, however it is possible to become domiciled based on residence within the UK.
Secondly, it’s always crucial to remind you we’re only talking about legitimate tax planning here – no offshore planning in Panama or anything else you may have seen in the news. We can plan to avoid tax but not to evade tax!
What makes up an estate:
- All property – wherever situated in the world. Property contents
- Life assurances
- Stocks and shares
- Bank and building society accounts
- Current accounts in a sole trader or partnership business
- Directors loan accounts in a personal company
- Life interest in a trust
- Less any liabilities such as funeral expenses, mortgages, loans etc
However, some of the above may have reliefs or exemptions available.
Let’s cover the most common misconceptions we’ve heard from clients:
Misunderstanding 1 – I am leaving all of my estate to my family, therefore there won’t be any inheritance tax to pay
This is actually only true in part. If married couples or those in a civil partnership
leave their estate to each other, there’ll be no inheritance tax on those assets. Why? Because there’s a specific IHT relief for assets passing between spouses.
However, where an individual’s estate exceeds £500,000 being the nil rate band of £325,000 and the residence nil rate band of £175,000 plus transferable nil rate band and residence nil rate band if available, and those assets are left to other family members or friends, then inheritance tax will be payable at 40%.
Misunderstanding 2 – I won’t have any inheritance tax to pay on my property overseas
For UK domiciled individuals, IHT is payable on worldwide assets.
You may even have tax to pay in the country in which the property is situated. Therefore it is essential to ensure you take legal advice in the country where your overseas assets are located.
Some overseas properties are owned in a company to ensure they will pass to the beneficiaries you wish, and in many cases to reduce any potential overseas tax. Even so, they are still taxable in the UK. In addition, a foreign Will is often required to ensure your assets pass as you intend.
Misunderstanding 3 – my joint estate is less than £1m, therefore I won’t have any inheritance tax to pay
This misconception is usually based on the budget announcement in 2015 which stated that a married couple and civil partners will be eligible to a new residence nil rate band, which when added to the existing nil rate band of £325k will give them £500k each, i.e £1m between them.
However the intricacies of the new legislation mean that in certain circumstances the full £1m may not be available, for example:
- The relief only applies where a property is left to one or more lineal descendants –this includes children, stepchildren, adopted children, grandchildren. If left to a sibling there will not be any relief and those with no children will not be able to benefit.
- If the value of the residence is less than the Residence Nil Rate Band (RNRB) then the relief is restricted to the value of the property
To understand the full circumstances and how they might apply to your situation, we recommend having a chat with us personally.
Misunderstanding 4 – I have given away assets so I won’t have IHT to pay on them
Provided you survive 7 years after making a gift then the value of the asset will fall outside of your estate.
However, you need to be very careful where gifts are made which you continue to benefit from. These are known as Gifts with Reservation of Benefit (GROBS) and will continue to form part of your estate. An example may be a property gifted to a child where you continue to occupy it. However, with planning before making the gift it may be possible to either eliminate or reduce this charge.
Misunderstanding 5 – I can only give away £3,000 per annum tax free
There are several inheritance tax reliefs available for gifts, which people get confused with.
- Small gifts exemption of £250 per donee
- Gifts in connection with a marriage
○ £5000 parent
○ £2500 grandparent
○ £1000 others
- Gifts out of income – if you can show that you have surplus income and that this is used to make regular gifts then these will fall immediately outside of your estate and not be dependent upon the 7 year rule. Examples of this include paying regular contributions towards grandchildren’s education, running of cars etc.
You can give away up to £3,000 IHT-free each year. However that doesn’t mean it’s the maximum you can gift. It just means if you don’t survive 7 years and the gift comes back into your estate, the first £3,000 of the gift will not be taxable. If one year’s £3,000 gift allowance isn’t used, then it can be carried forward for one year only. A married couple can therefore gift away £6,000 per annum.
Your unique circumstances are the most important factor here
There are some general tax planning tips we can offer you, but the most effective advice you’re going to get will be related to your personal situation.
It’s okay to still be unsure of where you stand – these rules can seem really complicated – and the rules do change. If you’ve already been planning for IHT, you may need to come back to your planning to update. We recommend always reviewing your IHT planning and Will every 5 years as family situations change.
We’re here to help you plan for your future, and answer any more questions, hesitations or confusions you might have around this important tax. Please make use of our expertise. We have saved clients many hundreds of thousands of pounds over the years!