Simple inheritance tax planning and advice can limit the tax you pay on your estate. Inheritance tax (IHT) not only affects the very rich, but many other people are liable without realising.
The sooner you find out what your liability is, the sooner you can plan to limit it so that more of your estate will be inherited by your loved ones.
What is inheritance tax?
If your estate exceeds the current IHT thresholds, everything above this that is not left to your spouse or civil partner, will be taxed at 40% upon your death. In most cases, it will fall upon your beneficiaries to pay this.
The current thresholds are £325,000 if you are single or divorced, and £650,000 per married couple. If you are widowed, it is up to £650,000 depending on how much allowance was used when your partner passed away. In July 2015, the Government announced that it would be gradually introducing a new main residence nil-rate band from April 2017, which will help people who want to leave their main residence to a direct descendant (such as a child or grandchild).
Lifetime options
When you are considering tax planning, it is important to remember the various lifetime exemptions available for inheritance tax, as well as those planned for in your Will.These lifetime options can result in significant tax savings.
- Annual exemption: you can make £3,000 worth of gifts in each tax year (6 April to 5 April) without incurring IHT.If the full £3,000 allowance is not used in one year, the unused part (or the whole) may be carried forward for a year only.
- Small gifts exemption: gifts of not more than £250 each may be made to any number of persons in a tax year.If any gift exceeds £250 in value, it will form part of the £3,000 allowance referred to above.
- Wedding or civil partnership gifts: gifts to your children (£5,000 limit per gift), grandchildren or great-grandchildren (£2,500 limit per gift) or anyone else (£1,000 limit per gift) can be made on, or shortly before, their wedding or civil partnership ceremony.
- Gifts out of income exemption: this is often overlooked, but it can be very useful, if you are able to satisfy the rules laid down by HM Revenue & Customs.In brief, the gifts need to be regular enough to be classed as normal expenditure out of your surplus income.We can give you advice on how this exemption works and the evidence that is required to enable a successful claim to be made to HM Revenue & Customs.
- Other lifetime gifts: all gifts made between spouses or civil partners (whether during lifetime or on death) are exempt from IHT. An exception to this is where the recipient spouse or civil partner is not domiciled in the UK, in which case the exemption is restricted to whatever the IHT nil-rate band is at the time of death. In the majority of cases, most gifts to other individuals will be exempt from IHT if you survive seven years after making them. However, there are exceptions to this and, if you are considering making lifetime gifts as part of your tax planning.