Heading the Wills, Probate and Trusts Team here at Ansons Solicitors, I talk to clients on a daily basis about planning ahead for the future, protection of family wealth and mitigation of Inheritance Tax. Such concerns are common these days and, whilst people are keen to pass on their wealth to the next generation, I find that there is often uncertainty and confusion about the UK Inheritance Tax (IHT) system and about what they can and cannot do.
Almost all of those clients I advise understand that if they make lifetime gifts, they need to survive seven years for the gift to be exempt from IHT and most people know that they can give away £3,000 per annum tax free. However, the detail, application and interaction of the IHT rules in relation to estates and trusts can be difficult to interpret unless you are well-versed in this area of the law.
More estates now paying IHT
The Treasury received around £5bn in IHT in the last tax year, a tenfold increase from 1980, with rising property values helping to double the number of estates paying IHT since 2011.
Rightly or wrongly, the current system can seem unfair to those people who have wealth to pass on to their children and grandchildren, but there is now hope that the position for everyone will be easier to understand.
Simplifying the rules
The Government is seeking to simplify the rules and asked the Office of Tax Simplification (OTS) to review the Inheritance Tax system and to make recommendations for change.
The OTS report offered 11 recommendations, which included replacing the range of lifetime gift exemptions with a single personal gift allowance at a sensible level and bringing in an increased lower threshold for small gifts.
One recommendation was to reform or replace the exemption for regular gifts with a higher personal gift allowance – a simple change that makes perfect sense.
However, the recommendation that has attracted the most media attention is shortening the period a donor must survive to exempt a gift from IHT from seven years to five; a move that will significantly reduce the workload of executors of estates.
The OTS report has also highlighted the interaction between Inheritance Tax and Capital Gains Tax (CGT), with many experts regarding CGT and not IHT as the true ‘gift tax’ when considering lifetime giving – it is important to consider all taxes when attempting to mitigate another.
It is clear that aspects of the current tax regime adversely affect the decisions families face when wishing to pass assets to the next generation, with different rules applying to largely the same transaction. A situation the OTS recommends resolving whilst questioning whether reliefs are targeted most effectively in the light of the Government’s tax policy.
A review of the current position
At present, the system has not changed and no timeline has been announced for any of the OTS recommendations to be adopted, if indeed they are acted upon. So currently the IHT system looks like this:
Each person currently has a basic tax-free allowance (or Nil-Rate Band) of £325,000. If you make no gifts before you die, then the first £325,000 of your estate is free of IHT. The estate over and above this threshold is subject to IHT at 40%.
If you have made gifts in the seven years before your death, which are neither fully exempt nor covered by your annual allowance of £3,000, then the £325,000 allowance is reduced by the value of those gifts falling into account. Where those gifts exceed in value your £325,000 allowance, there is IHT due on both the residual portion of those gifts not covered by your allowance and on your estate, which would not have the benefit of any allowance since this has been used up completely by your lifetime gifts.
If you leave your estate to your UK domiciled spouse or civil partner, then an exemption from tax applies. In addition, your deceased spouse or civil partner’s unused £325,000 can be transferred and claimed against your estate in addition to your own tax allowance.
Since the 6th April 2017, an additional Residence Nil Rate Band Allowance has been available when a residential property that has been the deceased’s residence at some point is left on death to a direct descendant such as your children or grandchildren. This allowance is currently £150,000 per person unless your estate exceeds £2 million in value, in which case it is tapered down by £1 for every £2 by which your estate exceeds £2 million. The rules are complex, particularly in relation to where the deceased has downsized or sold their residence before death.
Certain business and agricultural assets qualify for relief from IHT. The rules are complex and you cannot automatically assume that they will apply.
Gifts made into a trust may also be subject to IHT, even when made during your lifetime, but again, this is a specialist area of tax planning. Once the assets are in the Trust, there may also be further IHT charges, albeit at a lower rate of IHT than the 40% rate applicable to estates on death.
There are some simple ways in which IHT can be mitigated by ‘chipping away’ at the value of your estate:
Whilst for many the picture remains unclear when it comes to UK Inheritance Tax rules, what is clear is the benefit of seeking and receiving expert advice from suitably qualified professionals, who will help you to avoid the many pitfalls that can befall the unwary.
No one likes to consider their own mortality, but the earlier you start planning for the future, the quicker you will achieve peace of mind and ensure those closest to you do not have to worry about tax at a difficult time when they are grieving your loss.
Please get in touch and learn more about how Ansons make it happen by emailing me Sarah Nash firstname.lastname@example.org or call me direct on 01543 267 981.