Tax Planning & Inheritance Tax

Inheritance Tax (IHT) is a tax on the value of the assets that you own (called your ‘estate’) on death.

IHT is paid out of the assets you own on death and it payable before any monies can be distributed to your chosen beneficiaries.

There are various reliefs, exemptions and allowances which can all be used to help minimise the exposure to IHT. This a complicated area and specialist advice should be sought.

Your IHT position on death can be affected by various factors such as:-

• Where you are domiciled when you die
• What gifts you have made in your lifetime
• Whether you receive a benefit from certain trusts
• Whether you own an interest in a business
• Whether you own any agricultural property

Our team can work with you to assess your situation and provide bespoke advice on mitigating liability to IHT.

There may be several allowances to be claimed on death, depending on your circumstances.

The first allowance available to us all is called the ‘Nil Rate Band’ (NRB). This means that the first £325,000 worth of assets is taxed at 0% i.e. is free from IHT. If your estate at death is worth less than this, there is no IHT to pay but bear in mind that this could be affected if you have made significant gifts in lifetime.

If you have given away assets during your lifetime but you continued to benefit from then, you need to be aware that (for tax purposes) HMRC will treat those asset as still being owed by you. This is due to special rules on ‘Gifts with Reservation of Benefit’. A typical example might be a parent who gives away a property but continues to live in it or perhaps visit it as a holiday home and without paying a market rent to do so.

There is a further allowance called the ‘Residence Nil Rate Band’ (RNRB). This applies if your estate includes a home which is passed on to direct descendants such as children, grandchildren, spouses, and civil partners.

In the current 2020/2021 tax year, the availability of the RNRB means that you can pass another £150,000 tax-free. However, this allowance is not available to everybody and so we recommend that you ask us for advice on how best to maximise your available allowances.

If you estate is worth more than the available allowances, your estate pays IHT at the rate of 40% on the excess above those allowances.

The charge to IHT can therefore be significant and we recommend that you seek advice from us as to how to mitigate the IHT.

Yes, it is possible to transfer allowances on the death of a surviving spouse or civil partner.

If you leave your estate to your spouse or civil partner then there is no IHT to pay between you. This is because the transfer is assets is exempt for IHT purposes. But, when the survivor of you dies, his or her estate is subject to IHT at that stage.

It is important, therefore, that the executors acting in the survivor’s estate claim the transferable allowances from the first person’s estate. These allowances are not automatically transferred and they can easily be lost if the application is not made or is incorrect. This is a good reason to seek professional advice when dealing with an Estate Administration / Probate.

Transferring a Nil Rate Band means that the survivor’s estate has a starting total of £650,000 free of inheritance tax. We then need to see if the RNRB can similarly be transferred.

The RNRB can similarly be transferred in certain specific situations. This could potentially mean a total tax-free allowance of £1,000,000 in the current 2020/2021 tax year.

If your estate includes a business or business assets, it may qualify for Business Property Relief (BPR).

If your business interests qualify for relief (and not all business interests will) then your estate pays no IHT on the value of those business interests.

BPR is either available at 100% or 50% and specialise advise should be sought.

If your permanent home or ‘domicile’ is in England or Wales, your estate must pay inheritance tax based on the value of all your worldwide assets – including any assets that you own abroad.

If you have your permanent home or ‘domicile’ elsewhere, then the value of your foreign assets are not subject to UK IHT.

Even if you do not have your permanent home in the UK, you may still be deemed to be domiciled here under special rules. This subject is complex and specialist advice should be sought.