Inheritance tax, or the ‘death tax’ as it is colloquially known, is one of the most contentious taxes in the UK. It’s also one of the least understood. Many people neglect to think about how their estate will be taxed when they’re gone, but failing to plan ahead with regards to inheritance tax can cause a significant headache for those that are left behind.
Who Pays Inheritance Tax?
Happily for thousands of pensioners, inheritance tax is only payable if your estate is worth more than £325,000. However, your estate will have to pay a hefty 40% on anything above that threshold.
So, if you leave a total estate worth £400,000, your beneficiaries could potentially lose £30,000 to the tax office.
How Can You Limit Inheritance Tax?
If you have an estate worth more than £325,000, there are a number of legal ways to limit your estate’s inheritance bill and help maximise your intended heirs’ inheritance.
Get Married
Marriage is one way to limit inheritance tax. Your spouse or civil partner can inherit your entire estate without having to pay any tax – no matter how large it is.
What’s more, a spouse or civil partner will also inherit the inheritance tax allowance that’s not used by their partner. So potentially, a couple could leave up to £650,000 without having to pay a penny in tax.
Any money or other assets left to other family members or friends will use a part of an individual’s inheritance tax allowance. So, if you leave £100,000 to a family friend or child, and the rest to your spouse or civil partner, your spouse or civil partner’s estate would only have use of the element of your inheritance tax allowance that was not used. Based on current rates, the £100,000 gift would equate to 30.77% of your inheritance tax allowance, so your surviving spouse or civil partner would have 169.23% of the normal inheritance tax allowance for individuals on his or her death, which currently equates to just under £550,000.
It is worth noting that it is the percentage unused that carries forward to the surviving spouse or civil partner’s estate, and not the actual monetary amount. Therefore, if the inheritance tax allowance increases between the deaths, it would be advantageous to have used none of the first spouse or civil partners allowance as the survivor’s estate would then have double the allowance on his or her death, which could well be higher than the allowance at the time of the earlier death. You would then benefit from the allowance increase twice.
Give It Away
Many people want to give away their money and possessions before they pass away and, depending on when you pass away, this can help to reduce the amount of inheritance tax paid. Each year, you can give away £250 to as many people as you want without it becoming part of your taxable estate.
You can also make gifts over £250 to individuals but up to cumulative maximum of £3,000 in total in each tax year and these gifts will be exempt from inheritance tax when you die. You can carry forward any unused part of the £3,000 exemption to the following year, but if you don't use it in that year, the carried-over exemption expires. You cannot treat the first £250 given to a person (if the total given to them exceeds that amount) as exempt under the category of gift set out in the preceding paragraph.
Wedding or civil partnership ceremony gifts are exempt from inheritance tax, subject to certain limits:
• parents can each give cash or gifts worth £5,000
• grandparents and great grandparents can each give cash or gifts worth £2,500
• anyone else can give cash or gifts worth £1,000
You have to make the gift - or promise to make it - on or shortly before the date of the wedding or civil partnership ceremony. If the ceremony is called off and you still make the gift - or if you make the gift after the ceremony without having promised it first - this exemption won't apply.
Any regular gifts you make out of your after-tax income, not including your capital, are exempt from inheritance tax. These gifts will only qualify if you have enough income left after making them to maintain your normal lifestyle. Obviously those with high net disposable incomes may be able to justify making substantial gifts under this exemption.
Give To Charity
Inheritance tax isn’t payable on any charitable donations, irrespective of whether you make them whilst you are alive or when you die. So you could donate money to:
• Charities
• Amateur sports organisations
• Museums
Without worrying about paying inheritance tax or using any of your inheritance tax allowance.
Larger Gifts
Any gifts you make to individuals will be exempt from inheritance tax as long as you live for 7 years after making the gift. These gifts are known as 'Potentially Exempt Transfers'. If you die within the seven years the value of the gift is added to the assets you actually possess at the time of your death to establish the overall value of your estate for inheritance tax purposes. If that produces a figure over the inheritance tax allowance threshold, and tax must be paid, the following sliding scale is used to determine what percentage of the tax due on the lifetime gift must be paid::
• 0-3 years before death – 100% of inheritance tax is payable
• 3-4 years – 80% is payable
• 4-5 years – 60% is payable
• 6-7 years – 20% is due
After seven years, any gifts will be outside of your estate for inheritance tax calculation purposes. It should however be remembered that if you give something away and retain a benefit from it (i.e. giving away a property and continuing to live in it), the seven year clock will not start ticking until you cease to reserve any benefit.
Want Expert Inheritance Tax Advice?
The above is just a brief overview about a very complicated topic. Speak to Howells today for specific advice about your circumstances. Our inheritance tax planning team based in our Cardiff solicitors office and Newport office can help you to ensure that your loved ones and dependants are well looked after once you’re gone. For a free, no-obligation chat call 02920 404034 or email: info@howellslegal.com.
by Laith Khatib
