Inheritance Tax is a tax paid on the value of your assets at death. People often have quite contrasting views about this, some take the view that they are not going to be around when it is due so there is no point worrying about it, others take the view that it is a further tax on their assets on which they have paid tax during their lifetime and so wish to minimise the liability as far as legally possible to do so.
Inheritance Tax is a tax of 40% (in most cases) paid on all assets you have over the ‘nil-rate’ band, which is currently set at £325,000. The Inheritance Tax rules are set to change in April 2017 and that, potentially (and only in some circumstances) gives a further nil-rate allowance. This article only discusses the current rules. The new rules will be addressed in the future, once in force.
Some ways to manage your estate’s Inheritance Tax liability
If you are married or in a civil partnership any assets you pass to your surviving spouse will be tax free as they are exempt for Inheritance Tax purposes. Further, the second of you to die can use any un-used parts of the nil-rate band of their spouse meaning they could have a maximum of £650,000 as a nil-rate allowance on their death. It is worth noting that any monies given to anyone other than the spouse on the first death would utilise the nil-rate band meaning that less or even nothing is transferrable to the estate of the second to die.
Spending money in your lifetime can be an ‘easy’ way to avoid payment of Inheritance Tax; however, this isn’t always practical. It is difficult to predict how long you might live and therefore, how much money you will require for yourself. Balanced with how much you would like to leave to your loved ones, it is perhaps not wise to reduce your assets just to attempt to lower a tax liability.
Gifting money is something else that can be done, again this carries the similar risks to spending money, you do not want to leave yourself short of funds and you need to be aware of the specific rules relating to gifting assets and Inheritance Tax. Everyone can currently gift £3,000 per tax year, free from Inheritance Tax. If you didn’t give anything away in the previous tax year you can carry one year forward meaning you could gift £6,000 this tax year. You can also make certain gifts on events such as Weddings (e.g. if it is your child you can give £5,000 if it is not, the amount varies), tax free.
Finally, you could gift any amount that you would like. However, you should note that it will not be “forgotten” for Inheritance Tax purposes unless you survive for a period of 7 years. Any gifts made in the 7 years before your death need to be considered when dealing with the administration of your estate, therefore, it is very wise to keep a detailed note of anything you gift. You should include the amount of the gift, who it was to and the date of the gift.
Whilst this article merely gives a snapshot of the Inheritance Tax rules and rules relating to lifetime gifts it should hopefully allow you to start to think about your own affairs. For detailed Inheritance Tax advice and planning it is strongly advised that you consult a firm of solicitors to discuss matters.
Glenn joined Bates Wells & Braithwaite in 2009 and gained experience across the firm before qualifying as a solicitor in November 2015. He has a law degree from the University of East Anglia and took the Legal Practice Course at the College of Law, London.
Glenn is part of the firm’s Wills, Trusts and Probate department and specialises in wills, powers of attorney and the administration of estates.
Away from work, Glenn takes a keen interest in watching and playing various sports and is a long-term season ticket holder at his local football club, Colchester United. A lot of his spare time is also spent enjoying his young family.