Inheritance Tax- How to mitigate your potential exposure by making use of allowances and exemptions
Posted on 22nd August 2022 at 10:40
As the cost-of-living crisis impacts on everyone more and more how do you ensure you leave the maximum amount to your family and loved ones on your death?
• Nil Rate Bands & Spouse / Civil Partnership Exemption
Every individual can leave £325,000 inheritance tax free on their death to any person. This is called your Nil Rate Band.
If you have children or other direct descendants and you are leaving them a residential property, you qualify for an additional Residential Nil Rate Band of up to £175,000 (depending on the value of the property). This means that you will be able to leave up to £500,000 inheritance tax free on your death.
If you are married or in a civil partnership, anything that you leave to your spouse or civil partner on first death is 100% exempt from inheritance tax.
On second passing, the survivor is able to carry over their spouse or civil partner’s unused bands, meaning they will be able to leave up to £1,000,000 inheritance tax free. (If you are unmarried, and your estate is worth over £1,000,000, it may be worth considering marrying to reduce your inheritance tax bill).
Any estates that are worth over £2,000,000 are treated as high-net-worth estates. The availability of the Residential Nil Rate Band is tapered down for estates worth between £2,000,000 and £2,350,000, with the available band reducing by £1 for every £2 over £2,000,000. Therefore, the Residential Nil Rate Band (£175,000) is not available to estates over £2,350,000.
• Charity Exemption
Gifts to charities are 100% inheritance tax free.
If you gift more than 10% of your net chargeable estate to charities in your Will, you will pay a reduced rate of 36% inheritance tax instead of 40% on the remainder of your estate.
• Small Gift Exemption
Any number of gifts of up to £250 per person during a tax year are exempt from inheritance tax. The exemption is only available if the gifts to that individual for the tax year do not exceed £250 in total and as long as you have not used another allowance on the same person.
Birthday or Christmas gifts you give from your regular income are exempt from Inheritance Tax.
It is not possible to carry forward any unused portion to the next tax year.
• Annual Exemption
You can make a gift of up to £3,000 per year and if you didn’t use the allowance the previous year you can carry this over enabling you to gift up to a maximum £6,000 inheritance tax free.
You can give gifts or money up to £3,000 to one person or split the £3,000 between several people.
• Marriage / Civil Partnership Gift Exemption
You can also give a tax-free gift to someone who is getting married or starting a civil partnership.
You can give up to:
- £5,000 to a child.
- £2,500 to a grandchild or great-grandchild.
- £1,000 to any other person.
The gift must take place on or before the ceremony and must be conditional on the ceremony taking place. The exemption is not available if the ceremony does not take place.
• Gifts out of Income
Lifetime gifts are exempt if they form part of the donor's normal expenditure out of income, provided that the donor is left with sufficient income to maintain his usual standard of living.
A regular pattern of giving is required, for example meeting annual school fees for a grandchild, paying rent for a child, or paying the premiums on a life policy for another's benefit.
The first gift in a series can qualify, provided further gifts are intended. If the donor dies before making the second gift, there must be sufficient evidence that he intended to make a series of gifts.
• Lifetime gifting
You are able to make gifts of unlimited value which will be exempt from inheritance tax, subject to you surviving 7 years after you make the gift.
If you fail to survive for seven years, then the gift becomes chargeable and will use up all or part of your nil rate band. However, the longer you survive after making the gift (subject to surviving at least three years), the lower the IHT charge:
- If you survive between 3 to 4 years from the date of the gift, the IHT charge on the gift is reduced by 20%.
- 4 to 5 years, reduced by 40%.
- 5 to 6 years, reduced by 60%.
- 6 to 7 years, reduced by 80%.
• Deed of Variation
A deed of variation is a device that is available to a beneficiary of a deceased person’s estate that allows them to give up their entitlements under the deceased’s Will or the intestacy rules in favour of other persons.
This can be used to lower the inheritance tax bill by:
- Giving 10% of the estate to a beneficiary who is exempt from paying inheritance tax (such as a charity) to lower the rate to 36%.
- Redirecting assets qualifying for inheritance tax relief from an exempt beneficiary to a non-exempt beneficiary so that the relief is not wasted.
- Using the deceased’s Nil Rate Band by creating a discretionary trust or making an absolute gift of the value of the Nil Rate Band.
- Using the deceased’s Residence Nil Rate Band by redirecting the deceased’s qualifying interest to their descendants.
• Gifts to Political Parties
Gifts to political parties are exempt, provided that the party is of sufficient stature. The requirements (as at the last general election) are that either:
- At least two members of the party were elected to the House of Commons.
- At least one member of the party was so elected and at least 150,000 votes were given to candidates who were members of that party.
• Gifts of Land to Housing Associations
Gifts of land to housing associations or to registered social landlords are exempt from IHT.
• Gifts for National Purposes
Gifts for national purposes are exempt from IHT. The IHT legislation contains a list of bodies and institutions that are covered by this exemption.
- Gifts to the National Gallery or British Museum, or another national institution which exists wholly or mainly for the purpose of preserving a collection of scientific, historic or artistic interest for the public benefit.
- Any museum or art gallery in the UK which exists wholly or mainly for the purpose stated above.
- Any library, the main function of which is to serve the needs of teaching and research at a university in the UK.
• Agricultural property relief
Where the conditions are met, agricultural property may benefit from relief at 100% or 50% (depending on who farms the land and how long the land has been owned). Relief is given on the agricultural value of the land.
Business property relief may also be available (after agricultural property relief has been given), for example, where a farmer owns the land and farms it as a business.
• Business property relief
The donor must have owned the shares or the business for at least two years prior to the gift or death. Further, certain types of activities and investments are excluded from relief. For example, relief is not available if the business or company's activities consist mainly in dealing in securities, stocks or shares, land or buildings, or making or holding investments.
Where the conditions are met:
100% relief is available for:
- unquoted shareholdings;
- interests in a business (whether owned as a sole trade or in partnership).
50% relief is available for:
- shares in a quoted company (where the donor had control of the company);
- assets, such as land and buildings, used by the donor's partnership or company.
• Woodland relief
Woodland may qualify for:
- Agricultural property relief, if it is ancillary to farmland.
- Business property relief, if it is commercial woodland.
If neither of these reliefs apply, woodlands relief might be available.
It is worth liaising with your financial advisor to discuss strategic investment vehicles, insurance policies or trusts for the purposes of inheritance tax mitigation.
• Giving gifts you still benefit from
If you give something away but still benefit from it (a ‘gift with reservation’), it will count towards the value of your estate for inheritance tax purposes.
Gifts with reservation include:
- Giving your home to a relative but still living there
- Giving away a holiday home but using it for free for your holidays
- Giving away a valuable vase but still displaying it in your home.
• Keep records of gifts you’ve given
The person who deals with your estate will need to work out what gifts you gave in the 7 years before your death. You should keep the following records:
- What you gave and who you gave it to
- The value of the gift
- When you gave it
Avery Walters can assist with estate planning and inheritance tax mitigation by advising on the preparation of tax efficient Wills and trusts.
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