Tax-efficient planning for your retirement and estate planning is crucial to ensure that you can have peace of mind that your assets will be passed on to your loved ones in a way that minimises your inheritance tax liability.
Currently any assets above the “nil-rate” allowance of £325,000 (£650,000 for couples) is subject to Inheritance Tax (IHT) of 40% when you die, or 36% if you donate 10% of your estate to charity.
Making use of lifetime gifts is a good way to reduce your estate to below the nil-rate threshold – although these will still be subject to IHT if you die within seven years of giving the gift, which is why it is crucial to make early plans.
The annual IHT gift exemption, which is not subject to IHT upon death, is £3,000. This allowance can be a carried forward for one (but not more than one) tax year.
Gift to charities and political parties are also IHT free, while £250 can be given, IHT free, each year to anybody you know, which is not counted towards the annual gift exemption.
Gifts on condition of marriage or civil partnerships are also IHT free, however these are limited to £5,000 from a parent, £2,500 from a grandparent and £1,000 from anyone else.
Furthermore, gifts out of income that do not form part of normal expenditure and do not reduce the standard of living, are also a very efficient way to reduce the value of ones estate for IHT purposes.
There are other reliefs available including woodland, heritage, farm and business. If you own an agricultural property that’s part of a working farm, then a percentage may be exempt from tax. Similarly if you own woodland, those who receive it in your will can apply for the timber on it, but not the land itself, to be deemed exempt. Do check what happens when the timber is sold, as inheritance tax may apply at that time.
Individuals using trusts should also be aware that HMRC are set to clamp down on the use of multiple trusts as a means of reducing IHT.
The tax authority is set to introduce a single nil-rate band (NRB) across all trusts, rather than a separate NRB for each individual trust as at present.
The measure is also likely to be retrospective, applying to trusts already in existence, as well as those set up in the future.
The proposal will split the nil-rate band between all relevant property settlements so that the 6% charge will apply to the total amount of assets held across all trusts above the threshold.
At JW Hinks, our Lifestyle Services team can provide a comprehensive inheritance tax planning service to ensure your wealth is protected.