The current allowances for inheritance tax will remain fixed until at least 2026. At a time when increased property prices are pushing more and more estates over those allowances, it is worth considering some general tips which can help save inheritance tax.
1. Know the Limits
As a starting point, it is important to understand the basic allowances which apply when an estate is assessed for inheritance tax. Every UK individual is entitled to a nil rate band tax free allowance of £325,000. An individual leaving residential property to their direct descendants might also qualify for the residence nil rate band allowance, which is currently £175,000. When you die, if the value of your net assets subject to inheritance tax is within the available allowances, there will be no inheritance tax to pay. Otherwise, inheritance tax is paid at 40% on the value over and above the allowances.
2. Key Exemptions
Gifts between spouses/civil partners, whether made during lifetime or set out in a Will, are exempt from inheritance tax and spouses can also transfer their allowances between them. If spouses/civil partners leave their assets to each other on the first death, no inheritance tax is due at that time. When the second spouse/civil partner dies, their estate can potentially benefit from their own nil rate band and residence nil rate band, together with the unused nil rate band and residence nil rate band of the first spouse/civil partner to die.
Both lifetime and post death gifts to registered charities are also exempt from inheritance tax. Furthermore, if you give more than 10% of your estate to charity, the rest of your estate might benefit from the rate of inheritance tax being reduced from 40% to 36%.
Business owners and/or agricultural property owners might benefit from inheritance tax exemptions for those types of assets. It is easy to mistakenly lose those valuable exemptions by failing to make specific provisions in your Will or by inadvertently taking steps which prevent the reliefs applying. Furthermore, if succession of those assets within the family is important, specialist advice can avoid unintended consequences as a result of the unexpected death of a director/shareholder.
3. Make Gifts
Many individuals use regular gifting as a straightforward way to reduce the value of their estates below the inheritance tax allowances. Small gifts of no more than £250 per person per tax year are exempt. Larger gifts to individuals of up to £3,000 in any tax year are also free of inheritance tax.
If you give away more than the annual allowance, but survive for seven years from the date of the gift, the gift will still fall outside your estate for inheritance tax purposes. If you die within seven years of the gift, the value gifted will use up some or all of your nil rate band allowance and might become chargeable to inheritance tax if the value gifted exceeds the total allowances available.
If you have an income which exceeds your expenditure needs, you might also qualify for an exemption which applies to regular gifts made from surplus income. Record keeping is key to this exemption, so it is worth taking legal advice if you might qualify.
4. Use Trusts (but only where proportionate and appropriate!)
Trusts are often considered to be a quick and easy way to mitigate tax. However, there are numerous complexities about how trusts are taxed which can make them more expensive. Furthermore, placing assets (such as your home) into trust can even significantly increase the inheritance tax due when you die.
Having said that, there are some assets which should almost always be written into trust to mitigate inheritance tax. These include life assurance policies, which if written into trust would be free from inheritance tax, but if not would be paid to your estate and therefore potentially subject to 40% inheritance tax.
If you are unsure whether a trust structure is right for you, always take expert legal advice from a qualified solicitor who is regulated by the SRA and covered by professional indemnity insurance. In particular, never place your home into trust without taking specialist legal advice.
5. Take Expert Advice
The above is a summary of some key points. However, there may be other valuable exemptions or opportunities relevant to your individual circumstances. Taking expert legal advice on your assets and current inheritance tax exposure will help you identify how you might mitigate that exposure and ensure that you have the correct legal documents in place to give effect to your intentions. At Neale Turk LLP we have the expertise to draft bespoke Wills tailored to meet your individual needs, whilst offering a transparent pricing structure which is published on our website. Charlotte Searle is the head of our Private Client practice, with over 15 years’ experience as a solicitor and a fully qualified member of the Society of Trust and Estate Practitioners (STEP) the Association of Contentious Trust and Probate Specialists (ACTAPS) and Solicitors for the Elderly (SFE). Charlotte is also recognised in the Legal 500 national directory of leading lawyers. If you need legal advice, give us a call, send us an email or visit our website. We are proud to have been providing friendly, expert legal advice to local residents for over 60 years.