Inheritance Tax (IHT) tends to be a subject that most people do not care to dwell on for obvious reasons, and it is surprising how many people do not think their estates will need to pay IHT. However, currently, the following allowances, (nil rate bands) are applicable for IHT purposes: Standard Allowance £325,000 Residence allowance £150,000 (increasing to £175,000 with effect from 6 April 2020). The Residence Allowance is only available if the family home is left to surviving children or their lineal descendants. Therefore, if the value of your estate exceeds the relevant allowance(s), the excess may be charged to tax at 40%. You can either choose to do nothing or take steps to reduce your potential Inheritance Tax liability. To give you food for thought, here are some suggestions to reduce the Inheritance Tax your estate may have to pay:
Getting married is a great way to reduce Inheritance Tax. Whether it is a formal marriage or civil partnership, the same rules apply, as long as both parties are domiciled in the UK. Where a marriage or civil partnership exists, any transfer between partners on death is completely free of Inheritance Tax, no matter the value. This means that you could leave all your assets to your partner without the tax man receiving a penny. As an added bonus, the surviving partner is able to combine any of your unused allowance with their own allowance upon their death. This means that he or she could have double allowances and, based on the 2019/20 rates, this could be worth as much as £950,000.
Make Gifts Out of Income
If you have income you do not need to maintain your lifestyle and you invest it, this creates capital that will be subject to Inheritance Tax. As an alternative, the excess income could be gifted to a third party, eg your children/grandchildren in the tax year it arises. As the gifts are made out of income, they are not subject to Inheritance Tax, the result being the income and the capital it would create is shifted out of your estate, therefore reducing its value.
Make Use of the Annual Inheritance Tax Exemptions
It is possible to make the following gifts each year and they will be exempt for Inheritance Tax purposes: Annual Allowance £3,000 Where the allowance of the previous year has not been used, it can be carried forward and an allowance of £6,000 applies in the current year. Marriage/Civil Partnership gifts Made by: Parent £5,000 Remoter ancestor £2,500 Party to the marriage/civil partnership £2,500 Other person £1,000 Any number of gifts of £250.
Passing On Your Assets Early
Gifting assets, eg cash, property, shares, during your lifetime is a good way of reducing the potential IHT liability. For example, if an asset worth £200,000 was gifted to your children/grandchildren, the IHT saving could be as much as £80,000, ie £200,000 @ 40%. However, care needs to be taken in the planning, as the capital gains tax aspect would need to be considered. In addition, in the case of property, ideally, it should be mortgage free to avoid complications with the lender or with Stamp Duty Land Tax. Gifts of cash would, of course, not attract CGT. Gifts of assets with a value in excess of the annual allowance of £3,000 are potentially exempt transfers for IHT purposes, which means that no IHT would be payable, provided you survive for 7 years following the date of any gift. Gifts made during the 7 years prior to death would form part of your estate for IHT purposes.
Write Your Life Insurance Policies Into Trust
By writing your Life Insurance Policy into a trust, it does not form part of your estate and is, therefore, not liable to IHT.
Give to Charity
If you leave something to charity in your will, it will reduce the value of your estate. You can also cut the IHT rate on your estate from 40% to 36%, if you leave at least 10% of your net estate to charity.
Manage Your Pension Correctly
The proceeds of a pension fund paid to a surviving partner are usually free of IHT under the spousal/civil partner exemption, however, the same cannot be said if they pass to, say, children. In this scenario, IHT would be payable, but it can be avoided by writing the pension policy into a trust. Steps should also, perhaps, be taken to avoid the proceeds a spouse/civil partner receives from becoming part of their estate for IHT purposes. For instance, adjusting the way the lump sum is paid, making it possible for them to have access to the funds, but protecting the remaining monies from IHT. Advice from the pension provider should be taken.
Inheritance Tax Friendly Investments
When assets are left in the form of certain investments, eg shares in Enterprise Investment Schemes and woodlands, either all or part of those investments would not be subject to IHT. In the case of Enterprise Investment Schemes, provided the shares are held for a minimum of 2 years, they qualify for 100% business property relief, which effectively means their value is not taxable. In the case of woodlands, the value of the underlying land qualifies for 100% relief.
Insure Against It
It is possible to take out an insurance policy which will cover the cost of the Inheritance Tax Liability. This will ensure that the Inheritance Tax is paid in full so that your heirs will receive the full value of their inheritance. As the proceeds from such a policy would form part of your estate, it is prudent to have it written in trust.
If all else fails follow the example of a famous pools winner from yesteryear and spend, spend, spend. Enjoy the fruits of your labour and keep your hard earned cash out of the hands of the taxman.
For any of your property tax needs, please do not hesitate to contact RITA4Rent today on Freephone 0800 1 22 33 57 or via email by clicking here.
- We recommend all professional landlords protect themselves and their business by gaining access to advice, information and education from a landlord association. Become a member of the Residential Landlords Association (RLA) today and join over 35,000 other landlords, just like you. Click here to become a member of the RLA today.
- Given the sheer level of tax changes in recent years, it might also be a good time to review your mortgage position. Please note we are not authorised to provide advice or arrange mortgages but we can introduce you to a firm who can. If you wish to discuss your policies or receive advice then please contact us and we will pass your details onto RLA Mortgages who are authorised and specialise within this area.
- propertychecklists.co.uk has been set up by Which? property author Kate Faulkner and offers checklists on everything from how to choose a buy to let through to securing tenants, letting them go and day-to-day management. If you have a question and want an independent answer, they will also help with that too – all free of charge!
- Finally, it can also be a great help communicating with like-minded landlords, learning about their experiences, and having a chat. You can do just that by heading over to Property Tribes today, the busiest forum for private and residential landlords in the UK.