It seems like every week we are being told new statistics in relation to life expectancy. The latest I saw was the North South divide in life expectancy which had grown to a 14 years difference in life expectancy for the richest compared to the poorest of areas.
Also, there are new statistics stating that year-on-year fewer and fewer people are putting wills in place. This shows more and more people are failing to plan for the inevitable.
Putting a will in place deals with how assets are to be divided on death. However, increasingly, due to the lack of planning, there is a major beneficiary taking 40% out of estates – HM Revenue & Customs (HMRC) taking Inheritance Tax. HMRC took more than £5.3 billion from people’s estates in 2017 and projections from the Office of Budget Responsibility suggest that a further £1.2 billion will be collected by the end of this tax year (5th April).
So what can be done to minimise what is taken out of your estate by HMRC?
Inheritance is always an uncomfortable subject as it involves people acknowledging their own mortality or for the children the realisation that their parents will not be around forever. Also, it can be uncomfortable for the children, who may not want to look like they are after their parents’ money.
There is normally no Inheritance Tax to pay if either:
- The value of your estate is below the £325,000 threshold, the Nil Rate Band.
- You leave everything to your spouse or civil partner, a charity or a community amateur sports club
- There is also no Inheritance Tax to pay on gifts between spouses or civil partners. You can give them as much as you like during your lifetime, as long as they live in the UK permanently.
- All gifts of any amount made out of normal income are exempt from IHT. However, you must be able to maintain your standard of living after making the gift.
Additionally, if property is being passed onto children (including adopted, foster or stepchildren) or grandchildren, your threshold will increase. This measure introduces an additional nil-rate band when a residence is passed on death to a direct descendant.
Including the property threshold, this means that the allowance in 2017/8 is £425,000 and this will rise to £500,000 each by 2021. This means that a couple will have a combined Nil Rate Band of £1 Million.
If you are married, or in a civil partnership, and your estate is worth less than your threshold, any unused threshold can be added to your partner’s threshold when you die.
Unfortunately, many people are not in a position to give away their assets, particularly if most of their wealth is tied up in their property.
However, for those able to consider giving away their assets, the secret of good IHT planning is to start early. Any gifts made can reduce the estate, although they may take time to fall out of the estate. After 7 years, any gift can be considered to be out of the estate. In the meantime, they are classified as Potentially Exempt Transfers. Over the 7-year period, the amount considered to be in the estate reduces. Gifts use up the IHT nil rate band first and are only relevant if the whole of the estate exceeds the nil rate band.
Example – John died in 2000 leaving all his money and assets to his wife, Susan. Susan died in 2017 and the estate was able to use John’s allowance as he had not used his and Jane’s allowance to make a Nil Rate Band of £650,000 (2 x £325,000). Jane’s estate was calculated at £1 million. Therefore, the IHT payable would be £140,000 (40% x (£1,000,000 - £650,000)). If Susan leaves her house to her son, Michael, there would be an extra allowance of £200,000 (£100,000 each for John and Jane). The tax would then reduce to £60,000 (40% x (£1,000,000 - £850,000)). If Susan put some money into trust for Michael 2009, and at the time of death it was worth £100,000, over 7 years have passed and the estate would now be £900,000. If this had happened, the tax would have reduced by £40,000 to £20,000 (40% x £900,000 - £850,000)).
|Inheritance tax calculation||Leaving property to children||Making gift £100,000|
|Estate value||£1,000,000||Estate value||£1,000,000||Estate value||£900,000|
|Nil Rate Band||£650,000||Nil Rate Band||£850,000||Nil Rate Band||£850,000|
|Taxable estate||£350,000||Taxable estate||£150,000||Taxable estate||£50,000|
|Tax @ 40%||£140,000||Tax @ 40%||£60,000||Tax @ 40%||£20,000|
As you can see, the use of a gift and the property allowance reduced the IHT bill from £140,000 to £20,000. Thus the estate would maintain £120,000 of value that it would otherwise lose.
There are many different ways that you can reduce the amount of your estate that could be subject to IHT that we would be happy to discuss. For any financial advice, Bradbury Hamilton is able to help. Visit www.bradburyhamilton.co.uk or call Sheriar Bradbury on 020 7220 7274 for more information.