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Planning for Inheritance Tax

Odyssey July 2016

In the 2015/16 tax year the number of estates where Inheritance Tax was paid was in the region of 35,000, up from just under 18,000 only three years prior. Before the Summer budget it had been predicted that in 5 years’ the number of estates paying Inheritance Tax would increase to in the region of 63,000.  However, as a result of the introduction of the new Main Residence Nil Rate Band on 6th April 2017, it is now estimated that in 5 years’ time, approximately 37,000 will be subject to Inheritance Tax (that is 1 in every 15 people dying in that tax year).

Set out below are 8 points to consider when planning to mitigate Inheritance Tax.

1. Ensure that the Nil Rate Band and Main Residence Nil Rate Band are Utilised 

If an individual spouse was previously a widow or widower then there is potentially a third Nil Rate Band which should be carefully protected in order that it is not lost.  Provided that the main residence is worth at least £350,000 then on 6th April 2020, up to £1million (£1.325million if a third nil rate band is available) can be passed onto beneficiaries (who must include children or grandchildren because of the residential Nil Rate Band) free of Inheritance Tax.

For couples who are not married or in a registered civil partnership ensure that the Nil Rate Bands (and the residential Nil Rate Band in due course) are used on the first death, there will be no transfer to the survivors. Clients in this position should consider using Discretionary Wills or old fashioned Nil Rate Band Discretionary Trusts in their Wills to ensure the Nil Rate Band and residential Nil Rate Bands are utilised on the first death and not wasted.

Where assets exceed the available Nil Rate Band (and the prospective available residential Nil Rate Band in due course) then clients might want to consider reducing their estates by planning during their lifetimes.

2. The Main Residence Nil Rate Band

From 6th April 2017 onwards grandparents and parents will be able to use an additional Nil Rate Band which applies only to residential property. The level of this additional Nil Rate Band will be £100,000 on 6th April 2017 and will then increase on 6th April each year by £25,000 so that on 6th April 2020 the residential Nil Rate Band will have increased to £175,000 per person.

For many people the majority of their wealth is comprised within the value of their home, the residential Nil Rate Band has the potential to make a significant difference to families. It only applies to parents and grandparents and can only be used where the home is being inherited by a direct lineal descendant although this also includes stepchildren, adopted children and foster children. In the same way that if the Nil Rate Band is unused it can be transferred to a spouse or civil partner for use on their death, the residential Nil Rate Band can also be transferred.

If the value of the share in the property is below the residential Nil Rate Band then the amount of the residential Nil Rate Band will be limited to that share in the property although any unused excess can be transferred to a spouse or civil partner (but only for use in respect of a share in the property in due course).

3. Gifts to which the seven year rule applies

Consider giving away cash, investments, property or other assets (be mindful of Capital Gains Tax on all but cash) and provided you survive for the period of 7 years from the date of making the gift, it falls out of their Inheritance Tax “clock”.

4. Business and Agricultural Property Reliefs

Consider Business and Agricultural Property Reliefs which are available for appropriate investments. For those who have these reliefs, they ought to check to ensure that they are optimised (for example land owned outside a Partnership business by the individual Partners will only qualify for 50% Business Property Relief and not 100%).

For clients who do not farm and are not in business, there are investments available which will qualify for Business Property Relief after the minimum two year ownership period. 

5. The Annual Exemption and Small Gifts Exemption

Individuals can give away up to £3,000 in each tax year without this being counted for Inheritance Tax purposes. In addition, they can make smaller gifts of up to £250 per individual and gifts on particular occasions, for example £5,000 to a child when they get married.

6. Gifts out of Income

Surplus income can be given away (provided that it can be clearly and properly demonstrated that it was surplus income) without it being taken into account for Inheritance Tax purposes.

7. Trusts

Trusts can still be used very effectively for Inheritance Tax planning and for many Trusts, it will be possible to hold over the capital gain on assets which otherwise would be subject to a large Capital Gains Tax bill if they were given away to individuals during lifetime.  Fundamentally there is a limit of £325,000 on gifts into Trust within any 7 year period, gifts above this will be subject to an Inheritance Tax charge of 20% of the value of the assets above £325,000, with a further Inheritance Tax charge if the Donor should die within 7 years of making the gift into Trust but Taper Relief is available.

8. Generation Skipping

Where Inheritance Tax is likely to be an issue for a family it may be worth asking grandparents to consider skipping a generation either by giving assets directly to grandchildren (but take particular care of the risk of divorce) or into a Trust for grandchildren.

In conclusion:

Sensible and legal planning done in good time can and does make a huge difference to family wealth. 

Natalie Smith

Consultant Solicitor

e nsmith@prettys.co.uk

t 01245 295282

 

 

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