24th January 2019
Planning how to deal with your assets in a tax efficient manner is an important but potentially complex task. An increasing number of estates will be liable to inheritance tax (IHT) on the owner’s death, so it is vital to consider how your will can be drafted to reduce the amount of tax that will be taken from your estate after you die, freeing up more money for your loved ones.
You can also consider whether to make gifts during your lifetime to minimise your IHT liability but this raises other tax considerations. Sue Hall, wills, trusts and estate planning solicitor with Myers & Co Solicitors in Stoke-on-Trent, Staffordshire explains what you need to think about when planning for your inheritance if you wish to minimise your tax bill.
The IHT threshold for an individual is £325,000 (also known as the nil rate band) so if your estate is worth more than that on your death, the value of your estate in excess of £325,000 could be taxed at 40 per cent. Many estates will exceed this threshold, particularly given the steep rise in property prices over recent years.
You can utilise various available tax reliefs and exemptions in your will to reduce the tax bill on your death, including:
If funds allow, consider making gifts during your lifetime to reduce the value of your estate and the potential IHT liability on death. You can make as many gifts of £250 to anyone you like without them being liable for IHT. You also have an annual exemption of £3,000, so you can give up to £3,000 to someone without incurring IHT (or £1,000 each to three people);
You could also consider making a gift known as a ‘chargeable transfer’. Although IHT may be payable if you die within seven years of making the gift, the potential tax decreases each year until it falls outside of your estate after seven years.
Further reliefs and exemptions may be available via business or agricultural property relief and shared property relief.
Tax planning for inheritance must include consideration of other taxes, notably capital gains tax (CGT) which can be a trap for the unwary. Importantly, CGT liability dies with the individual, but it may arise if you make lifetime gifts.
A gift of property (other than your main home) or an expensive work of art could, for example, give rise to CGT on the increase in value since you acquired it. This means that whilst a lifetime gift would reduce your IHT liability on death, it could incur an immediate CGT bill when the gift is made. You need to carefully consider whether it makes more financial sense to make a lifetime gift and pay a CGT bill now, or deal with it in your will and save IHT on your death.
Finally, there may also be income tax considerations if you create a trust, as the income from a trust fund is liable to income tax.
This is a highly complex area of law, and to find out about how best to navigate the tax implications you should see a specialist solicitor who specialises in inheritance tax planning.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.