Inheritance Tax (IHT) is a tax on the estate of an individual who has died, including all property, possessions and money.
The former Chancellor of the Exchequer Nigel Lawson once said, ‘inheritance tax is a voluntary tax, you can either do nothing or volunteer for your beneficiaries to pay it, or you can take steps to avoid it’.
Normally IHT is not applicable where; the value of the estate is below the IHT threshold of £325,000, the individual leaves everything to a spouse or civil partner or the estate is left to an exempt beneficiary such as a charity.
Should the value of an individual’s estate exceed the Nil Rate Band of £325,000 the remainder will be become liable to a tax rate of 40%. There is an additional Residence Nil Rate Band currently £125,000 which is available for current or former residences, which could in effect give you a nil rate band of £450,000. The Residence Nil Rate Band is restricted in respect of estates over £2,000,000.
There are a number of exemptions and reliefs available that can be used with careful planning to mitigate any potential Inheritance Tax liability, providing the necessary conditions are met, the following are just some of those that are available;
Business Property Relief (BPR)
BPR is available at a rate of 50% or 100% depending on the type of business asset. These reliefs are only available where the deceased owned the business or asset for at least 2 years before they died.
Agricultural Property Relief (APR)
This relief is available on the value of agricultural property which is transferred either in lifetime (gift) or on death. APR may be available in respect of land and farm buildings, and is similar to Business Relief again at a rate of 50% or 100%.
Potential Exempt Transfers (PET)
PETs enable an individual to make gifts of unlimited value which will become exempt from Inheritance tax only if the individual survives for a period of seven years. If gifting an asset, the individual may need to consider if Capital Gains Tax may be due.
An individual can gift £3,000 per annum which will immediately be outside their estate for IHT purposes. If you do not use this exemption in one year it can carry over into the next year, but the maximum Annual Exemption anyone can use in any one year is £6,000.
There are a number of exempted gifts that an individual can give on the occasion of marriage or civil partnership. An individual can gift £5,000 to their children, £2,500 to a grandchild and £1,000 to anyone else.
Small Gift Exemption
An individual can gift up to £250 per person in any one tax year. The total gifts in a tax year to any one person cannot exceed £250 and cannot be used with any other exemptions.
This is only some of the planning options available and it is important to speak to a professional advisor as estate planning is a complex area which needs to be tailored to each individual. If you believe your estate may be liable to any future IHT it is important that you plan ahead to maximise any reliefs and exemptions available to reduce any potential tax bill for your beneficiaries.