Inheritance Tax – You Can’t Take It With You!
The saying goes that the only certainties in life are death and taxes, and those two are inextricably linked. Inheritance tax (IHT) is evolving and, even if you’ve already got a sound financial plan in place, it could be worth reviewing it. If you haven’t yet got your inheritance tax plan nailed down, now is the time.
Estates’ values are increasing due to land and property price increases, so even the value of your home could push your estate into a level that brings a charge of IHT. Legislation is changing, so take these into account:
- From 6th April 2027 unused pension funds will form part of your estate. Previously pensions were excluded from your estate when you die, so this may impact how you manage your remaining funds. With the new legislation private pension funds will be potentially subject to IHT of 40% and, when the after tax funds are distributed to the beneficiaries, these become taxable income, so the beneficiaries will then pay income tax at their higher rates on top of that.
- Once your net estate value exceeds £2 million the Residence Nil rate Band reduces by £1 for every £2 above £2 million. At £2,350,000, the Residence Nil Rate Band is completely lost
The Residence Nil Rate Band relates to the family home passing to children or grandchildren. Currently there is a tax free individual allowance for this of £175K, which is in addition to the inheritance tax nil rate band of £325K. This applies to both husband and wife, so together would total a tax free amount of £1 million. Bear in mind that living with a partner doesn’t apply, this is only applicable if you are married or in a civil partnership, otherwise your estates are taxed individually and the tax-free allowance cannot be added to the surviving partner’s.
Strategies
If you have an excess of funds you don’t need, you can gift it in a number of ways, to reduce the overall value of your estate.
Gift cash. There is no Capital Gains Tax for the donor on gifting cash. The gift is known as a potentially exempt transfer. If the doner survives more than 7 years from the date of the gift, it will not be taxable for Inheritance Tax. If the doner survives more than 3 years from the date of the gift, the inheritance tax liability tapers gradually.
Small gifts. You can give up to £250 per tax year to different individuals, and this is not taxable for Inheritance Tax. You can give as many of these amounts of £250 as you wish – if you have lots of children and grandchildren, it’s a good way to pass your wealth on, without it attracting tax.
Annual exemption. You can gift up to £3,000 per tax year too and this is not taxable for Inheritance Tax. If you did not use your annual exemption from the previous tax year, you can utilise this also. It is important to note the annual exemption and small gifts exemption cannot be used in combination to the same recipient in a tax year.
Gifts out of income. If you have a surplus of income in each tax year after deducting living costs and tax (employment income, dividend income, property income, sole trade income, pension income and partnership income) this can be gifted. So, for instance, if you earn £100,000 each year after tax and only need £60,000 to live on, the remaining £40,000 can be gifted and will not be seen as a potentially exempt transfer. Gifts out of income is not taxable for Inheritance Tax. The key point here is the gift needs to be from income and not capital or accumulated savings. The gifts can also not affect your current standard of living.
With the above, for any gifting you should keep a log of these gifts as this will help your accountant or executors to your estate when you pass. For gifts out of income a breakdown for each tax year the gifts were made along with the income for that tax year, tax liability and associated costs need to be supplied to HMRC when completing and providing the relevant Inheritance Tax forms and documents for the deceased’s estate.
If you have any questions about Inheritance Tax, then feel free to get in touch with the Cook & Partners team, and we’ll be more than happy to help!
