Inheritance Tax

Planning for, and later dealing with Inheritance Tax is, understandably, a sensitive topic that is often dealt with at a distressing time.

At Hanley & Co we pride ourselves on our compassionate, pro-active, and common sense approach.

As with any tax (but with IHT in particular) it can pay dividends (literally!) to undertake pro-active planning (with our complete confidentiality of course).

What are the rules?

IHT is a Capital Tax and whether you are subject to IHT depends a lot on your Domicile Status. Your domicile means the country of your ‘natural or permanent home’.

• Individuals who are domiciled (or deemed domiciled) in the UK are generally subject to IHT on their worldwide assets.

• The main category of ‘deemed domicile’ is those who have been UK resident for at least 15 of the last 20 years.

• In contrast, non-UK domiciled individuals are normally subject to IHT on their UK assets only.

IHT is payable at 40% where a person’s assets on death, together with any gifts made during the seven preceding years, totalling more than the nil rate band (NRB). The NRB is £325,000 currently and this is fixed until April 2028.

An important point for IHT planning is that unused NRB can be transferred to a spouse or civil partner, so couples can have a combined NRB of up to £650,000 on the second death. The amount transferable is the percentage of the deceased’s unused NRB at the time of their death, as applied to the NRB in force at the date of the second death.

There is an additional relief that can be claimed. A separate, additional ‘residence NRB’ is available in respect of a property that at some point has been the deceased’s main residence and which is passed on death to a direct descendant (or their spouse).

• This is currently £175,000 and fixed at this level until April 2028.

• If unused, this relief will also be transferable to the deceased’s spouse or civil partner.

• The relief will be tapered where estates are over £2 million in size (before reliefs and exemptions), such that estates over £2.35m (or potentially up to £2.7m for a surviving spouse) receive no benefit from the additional nil rate band.

• If an estate does not qualify for a full residence NRB, it could be entitled to a further relief known as a ‘downsizing addition’ if three conditions apply:

  1. The deceased disposed of a home on or after 8 July 2015 and either downsized to a less valuable property or they ceased to own a home; 2)
  2.  The former home would have qualified for the residence NRB if it had been retained; and
  3. At least some of the deceased’s estate is inherited by his or her direct descendants or their spouses.

So how can Hanley & Co help with IHT planning?

We are very experienced at coming alongside you to help with IHT planning. Things to consider are:

• Consider gifting assets during your lifetime to minimise the IHT payable on your death.

• Such gifts will fall outside the IHT net if you survive a further 7 years after making the gift (provided you do not reserve a benefit in the asset transferred i.e. the right to live in a house that you have gifted).

• If you die within 3 years of making the gift, a taper kicks in where the amount of IHT potentially payable on the gift (should you die within seven years of making it) is generally reduced, based on how long you survived.

• The gifting of assets can give rise to CGT liabilities, but some assets are exempt from CGT e.g. cash and gilts). 

• If you have income surplus to your normal living expenses, consider making use of the IHT exemption for regular gifts out of surplus income.

  1.  Such gifts are tax-free, even where death occurs within seven years.
  2.  Appropriate documentation should be retained to show that the gift is regular and made from income not required by the donor to cover their living expenses.

 Make use of other IHT reliefs and exemptions

  1.  The annual exemption of £3,000 (£6,000 if no gifts were made during the previous tax year);
  2.  The small gifts exemption of £250 per donee p.a.
  3.  Gifts made in consideration of marriage (£5,000 to children, £2,500 to grandchildren, and £1,000 to anyone else).
  • Consider taking out life insurance to fund any contingent exposure to IHT, although the availability and cost will depend on the transferor’s life expectancy.
  • Consider increasing bequests to charities to 10% or more of your net estate, which will mean that a reduced IHT rate of 36% applies to the remainder of your estate.
  • If you sell your home (e.g. to move into care or downsize), keep records of the transactions, so that on your death the downsizing addition may be claimed if you leave sufficient assets to direct descendants or their spouses.
  • Consider investing in assets qualifying for Business Relief, which are exempt from IHT after being held for a continuous period of 2 years (e.g. AIM shares held in a personal ISA).
  • Most importantly of all, make sure you have an up-to-date will (including any required Power of Attorney), that is not only efficient from an IHT perspective but also distributes your assets based on your current family circumstances.

So, if you have any questions at all about IHT or would like us to get involved in your IHT planning please do not hesitate to contact us.

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