Our ‘Top 10’ Tips to Keep Inheritance Tax to a Minimum
It may be a sensitive topic for discussion but the fact that people don’t like talking about inheritance tax means that it’s an extremely confusing area for families across Northern Ireland – which could prove very costly.
Inheritance Tax (IHT) is a tax charged by HMRC on the estate of someone who has died, including all the deceased’s property, possessions and money.
For beneficiaries, or people who have inherited some or all of a loved one’s estate, the standard rate of Inheritance Tax is 40%, but this is only charged on the part of the estate that exceeds the IHT tax-free threshold (currently £325,000).
To help people affected by this, and to make those potentially awkward conversations a little easier, the team at Lisburn-based digital accountancy specialist Exchange Accountants has put together some tips to ensure that people aren’t paying HMRC more than they need to do upon the death of a loved one.
“Our experience shows that the whole area of inheritance and related taxes is a subject that people really don’t feel comfortable talking about,” said Exchange Accountants director William Gould, “and one they tend to put off until they absolutely have to, which is often a time when they are at their most distressed by the situation they find themselves in.
“This can cost people a lot of money in unnecessary inheritance which, with proper planning, could be avoided. With this in mind, we decided to put together some useful tips and advice that will certainly help people who, in the absence of any unpleasant discussions with loved ones, are wondering how they may be affected when the inevitable occurs.”
Exchange Accountants – 10 ways to pay less inheritance tax to HMRC
Be mindful of inheritance tax thresholds
Inheritance tax is a tax on the estate (i.e. the property, money, and personal possessions) of someone who has died. There’s normally no inheritance tax to pay if either:
- the value of your estate is below the £325,000 threshold (your ‘nil rate band’); or
- you leave everything above the £325,000 threshold to your spouse, civil partner, a charity, or a community amateur sports club
Furthermore, if you leave the family home to your children (includes adopted, foster or step) or grandchildren in your Will, then your nil rate band can increase to up to £500,000. If you’re married or in a civil partnership and upon death your estate is worth less than your available nil rate band, then your partner’s threshold will subsequently be increased by the portion of your unused band.
Where there’s a Will, there’s a way
The first, and most important, step in inheritance planning is making a Will and keeping this up to date. Your accountant or an independent financial advisor can assist you with effective inheritance tax planning by undertaking a review of your current estate and making recommendations to ensure that your family inherit more of your estate when you die and you don’t pay more inheritance tax than is absolutely necessary.
Consider putting some assets into trust
A trust is a legal arrangement whereby you give cash, property or investments to someone else (a ‘trustee’) so they can look after them for the benefit of another person (a ‘beneficiary’). For example, you might decide to put some of your savings aside into a trust for your children – the trustee might be another family member, and the beneficiaries would be your children.
It’s important to understand that the trustee (i.e. the person who owns the assets in the trust) has the same powers that an individual would have to buy, sell and invest their own property, and it’s the trustee’s job to run the trust and manage the trust’s property responsibly.
If you put assets into a trust, then provided certain conditions are met, they no longer belong to you. This means that when you die, their value normally won’t be counted as part of your estate, and therefore not taxed. Instead, the cash, investments or property now belong to the trust.
Business owner exemptions
Business property relief can be a very valuable inheritance tax relief for business owners. Dependent on circumstances and provided there has been a minimum ownership period of two years, then relief may be available at either 100% for businesses and shares in unquoted trading companies, or 50% for assets such as property owned personally but used wholly or mainly by the business.
Gift cash to family members and friends
You can give away up to £3,000 each tax year to reduce the value of your estate; this is known as your ‘annual exemption’. This exemption can be used on one person or split across several recipients. Any unused annual exemption can also be carried forward for up to one tax year.
Unlimited cash gifts exceeding £3,000 can of course also be given to individuals tax free, but these are known as ‘PETs’ (potentially exempt transfers). However, inheritance tax may have to be paid on these gifts if you were to die within 7 years of making the gift (subject to any available ‘taper’ relief and other exemptions such as gifts made to spouses).
Small cash gifts of up to £250 per person, per tax year, can also be made tax-free. Care should be taken here however, as this is an ‘all or nothing’ relief; whereby if the £250 limit is exceeded then the entire gift will not qualify for exemption and may become chargeable to inheritance tax if you were to die within 7 years of the gift (as above).
Spend your money before you die
If for example, you are sadly faced with the prognosis of a terminal illness and don’t have a very long life expectancy ahead, then this could be a good time to treat your family members and friends to a special holiday or another type of experience that you can share together.
Not only will this reduce the amount of capital in your estate for inheritance tax purposes, but you will also have the chance to make some final memories that those close to you are likely to treasure for many years to come.
Make the most of wedding gift allowances
You can gift cash tax-free to loved ones upon the start of a marriage or civil partnership. You can give up to £5,000 for a child, £2,500 for a grandchild or great-grandchild, and £1,000 for any other person. If you’re giving gifts to the same person, you can combine a wedding gift allowance with any other allowance (excluding the ‘small gift’ allowance). For example, you could give your child a wedding gift of £5,000 as well as £3,000 using your annual exemption in the same tax year.
Buy a funeral plan
A prepaid funeral plan lets you pay for your own funeral in advance. The benefit of doing this is that the financial (and emotional) burden doesn’t fall on your loved ones, giving both you – and them – peace of mind. Your funeral costs are also deductible from the value of your estate for inheritance tax purposes.
Take out a life insurance policy
Taking out life insurance and directing the money into a trust will not directly reduce the amount of inheritance tax you’ll have to pay; but it will make it easier for your surviving family members to pay any inheritance tax bill that might arise on your death.
If paid via trust, the proceeds from a life insurance policy are not taxable. The pay-out from a policy such as this may prevent your loved ones from having to sell the family home for example in order to raise cash to pay any inheritance tax due on your estate.
Donate to charity
If you leave money to charity in your Will, this is considered to be an ‘exempt transfer’ and effectively reduces the value of your estate for inheritance tax purposes.
Furthermore, where at least 10% of your ‘net estate’ (after allocation of reliefs and available nil rate band) is left to charity, the rate of any inheritance tax charged on your estate automatically reduces from 40% to 36%.
For advice on inheritance tax, please contact us on firstname.lastname@example.org or call 028 9263 4135 and we will book an appointment for you with our Inheritance Tax specialist, Director, William Gould.