Inheritance tax is a choice
Most people pay inheritance tax because they do nothing about it during their lifetime.
Generational inheritance tax is the worst though. This is where your estate pays IHT on your death, but because you pass on your estate normally through a basic will to your beneficiary who already has a sizable estate when they die IHT will be payable on their estate, and again on the bit you gave them. Compounding the IHT issue for generations.
There is a solution to this though. By placing your estate into trusts when you die you can stop the generational inheritance. (Download Generational IHT Factsheet )
I have put together an overview of the different allowances that can be used during your lifetime to reduce your potential IHT liability. I will also explain to you a simple strategy to utilize some of these allowances and help you start reducing your potential IHT today.
Inheritance Tax (IHT) Overview of Allowances
- Nil Rate Band NRB threshold currently £325000 per person and has been since April 2009 and is frozen until April 2021.
- Additional Residence Nil Rate Band (RNRB) currently £175000 per person. (Conditions apply)
- The inheritance Tax Rate is 40%. Charged on estates that exceed the threshold
- A reduced rate of 36% can apply if 10% or more of the net estate is being left to charity.
Gifts in Lifetime
A way to reduce the value of your estate during your lifetime, to lower the amount of estate value accountable to IHT on death.
- No inheritance tax between spouse / civil partners.
- Survive 7 years after a gift has been made to be outside of your estate. Although there are accept gifts.
- People you give a gift to will be charged inheritance tax if you give away more than £325000 in the 7 years before your death.
Exempt Gifts
- £3000 each tax year. Annual exemption. Any unused allowance can be carried forward, but for 1 year only.
(For example)
The tax year 2019 -2020 you make a gift of £3000 but didn’t make a gift in the 2018-2019 tax year, so you can gift a further £3000 in 2019-2020 to utilize the previous unused 2018-2019 tax year. So £6000 gifted in 2019-2020 and immediately exempt.
Each Tax Year you can also gift away.
- Weddings or Civil Ceremony gifts of up to £1000 per person (£5000 for a child, £2500 for a grandchild or great-grandchild.
- Regular gifts out of surplus income. You must be able to maintain your standard of living after making the gift.
- Payments to help with another person’s living costs, such as an elderly relative or a financially dependent child.
- Gifts to charities or political parties
- You can use more than one of these exemptions on the same person- for example, you could give your grandchild gifts for her birthday and wedding in the same tax year.
- Small gifts up to £250. You can give as many gifts of up to £250 per person as you want during the tax year as long as you haven’t used another exemption on the same person.
Using the annual allowance of £3000 to reduce your IHT bill on death.
Example,
Mr. Clever has an IHT liability. He has £100k to consider gifting but initially still wishes to retain the option of benefiting from the gift.
- He establishes a Gift Trust in Year 1 he Loans £100k to the gift trust and its trustees, the trustees may wish to take financial advice on these funds.
- Being a loan the £100k is still deemed in his estate of the IHT. So clearly none of the £100k settlement made to the trust is currently outside his estate for IHT.
- In year 1 Mr. Clever decides he is able to gift his annual allowance and the previous year's unused allowance. He waives part of the repayment of the loan back to him and confirms this in writing.
- £94000 is still remaining in his estate for IHT and £6000 is immediately out of his estate for IHT and no need for the 7 Year Clock.
- In Year 2 he again decides he is able to gift his annual allowance and again confirms in writing. A further £3000 is immediately outside his estate and no 7 Year Clock needed.
- £9000 in total is now out of his estate for IHT.
- The same happens in Year 3, now he has £12000 out of his estate for IHT and this equates to a reduction in IHT of £4800 (£12000 x 40%). And so on….
You can see that using this simple strategy really can help reduce IHT, whilst still having the option to benefit from the initial funds.
This strategy also works for married couples. You would both set up a gift trust and follow the same strategy but obviously, you are doubling the amount each year that is immediately out of the estate.
You could also add into these, Gifts out of Surplus Income.
If Mr. Clever had a surplus income of £2000 per month and Mrs. Clever and surplus of £1000 per month, they could each pay this surplus income into their respective gift trusts and immediately benefit from it being out the estate for IHT.
This example could see Mr & Mrs move £36000 out of their estate for IHT each year, just through surplus income, and a further potential £12000 in Year 1 from allowances.
Total out of the estate in Year 1 is £48000, and this can be done year on year. Also because the funds are in gift trusts they are fully protected for the beneficiaries against attachable events such as marriage after death, divorce, creditor claims, and care fees.
If you would like to learn more about these strategies and also how Strategic Wills can help protect your estate for your future generations please check out my website www.strategicwills.co.uk or contact me on 01249 704863