Estate planning to minimise your tax liability is essential. Currently, inheritance tax (IHT) is payable where a person’s taxable estate exceeds £325,000.
Gifting and making use of IHT exemptions are some examples of tax-efficient estate planning.
Ensure that you make the best use of the available lifetime gifting exemptions including:
- £3,000 annual exemption;
- gifts in consideration of marriage (to specified limits);
- gifts up to £250 per person per annum;
- donations to charities;
- a gift between spouses, (special rules apply if a spouse is non-UK domiciled).
You can also make regular gifts out of income, perhaps for premiums on an insurance policy written in trust for your heirs. Regular payments of this type are exempt from IHT, but your executors will need to prove the payments were:
(a) regular and;
(b) out of surplus income, so you will need to keep records to support the claim.
Transferring your business
You may wish to transfer your business to the next generation and a gift of business property today may qualify for 100% IHT relief. Any capital gain may be held over to the new owner, so there will be no current CGT liability. If business or agricultural property is included in the estate, it may be appropriate to leave it to someone other than your spouse; otherwise you may lose the benefit of these special reliefs.
If you die within seven years of making non-exempt gifts, they will be added back into your estate. You can take out a life assurance policy to cover this tax risk if you wish. You may therefore want to make lifetime gifts earlier perhaps through a gift into trust, and as a trustee you can retain control over the assets (this may however be subject to CGT or lifetime IHT charges).
IHT and the main residence nil-rate band
An additional nil-rate band is being introduced where a residence is passed on death to direct descendants such as a child or grandchild. This will be £100,000 in 2017/18, rising to £175,000 in 2020/21, and will increase in line with CPI from 2021/22. This band can only be used in respect of one residential property which has, at some point, been a residence of the deceased.
Any unused nil-rate band may be transferred to a surviving spouse or civil partner. It will also be available when a person downsizes or ceases to own a home on or after 8 July 2015 and assets of an equivalent value, up to the value of the additional nil-rate band, are passed on death to direct descendants.
There will also be a tapered withdrawal of the additional nil-rate band for estates with a net value (after deducting any liabilities but before reliefs and exemptions) of more than £2 million. This will be at a withdrawal rate of £1 for every £2 over this threshold.