If you are single with net wealth of more than £325,000, or a married couple or civil partners with a joint net estate of more than £650,000, you may have an Inheritance Tax (IHT) exposure. The good news is that there are a number of ways in which you can mitigate or plan for this:-
Have a Tax Efficient Will
- Your Will should make full use of relevant exemptions.
- It should also maximise the opportunity for capturing any reliefs which may apply.
- If you are married/in a civil partnership and have children, you should consider whether it should include a trust arrangement which would provide the opportunity to pass assets within your nil rate band to your children rather than to your spouse/civil partner.
- A bequest of at least 10% of the taxable estate to charity will secure a reduction in the applicable rate of IHT from 40% to 36% (for deaths after 5th April 2012).
Gifts of Capital
- These can be outright or into trust - if your intended beneficiaries are young or otherwise vulnerable, a trust should generally be used.
- Up to £3,000 can be gifted each tax year free of IHT, and if not used in one year, can be carried forward to the next year only. Beyond this, other exemptions or reliefs may apply to extinguish or reduce the IHT exposure in respect of both outright gifts and those into trust
- Unless a particular exemption or relief applies, an outright gift of any amount will be potentially exempt from Il-IT at the time of making, and fully exempt if you survive it by 7 years. If you die within 7 years, IHT will be due at up to 40% if the gift value exceeds your nil rate band, although taper relief will apply if you’ve survived for 3 or more years.
- Gifts into trust within your nil rate band will have no upfront IHT cost, but may be subject to IHT at up to 40% if you die within 7 years. Above the nil rate band an immediate charge of 20% will apply, with a further charge of up to 20% on death within 7 years.
- For any gift, you cannot benefit from the gifted asset going forward, unless you pay full consideration for this benefit (but see Discounted Gift Trusts below).
- In making outright gifts you should be careful to avoid incurring capital gains tax charges. If capital gains are a problem, consider using a trust arrangement which will allow them to be held over.
Gifts of Surplus Income
- Regular gifts of surplus income will be IHT free provided the correct arrangements are put in place upfront so that a pattern of gifting can be established.
- Gifts may be outright or into trust.
- To qualify for the exemption, the gifts cannot impact on your standard of living.
Discounted Gift Trust
- A useful gifting arrangement if you have significant cash resources and continue to require an income from them.
- Cash is gifted into trust to be held within an investment bond for chosen beneficiaries.
- You can draw an income of up to 5% of the sum gifted, per annum, for 20 years, and thus can continue to benefit from the gifted capital.
- The value of the gift into trust, for FIT purposes, is discounted to reflect the income arrangements, and the discounted element is exempt from IHT. The amount of the discount will depend on your age, your health, and the amount of income you require. The balance of the gift is subject to the usual IHT rules for gifts into trust — see above.
- Any death benefits payable as part of your terms of employment, or through your pension arrangements should be nominated to the persons you wish to receive them, to take them outside your estate for IHT purposes.
- There are no IHT implications in making a nomination.
- If the benefits are likely to be significant, you should consider using a trust as a nominee, to increase the opportunity for passing on the benefits as IHT efficiently as possible.
- A way of planning for, rather than mitigating, an IHT exposure.
- Particularly useful if there will not be sufficient liquid assets available to pay IHT or there is a desire to keep the estate intact.
- Can be a whole of life policy, designed to meet all or part of the IHT liability on death, or a gift policy, intended simply to meet any IHT liability arising in respect of death within 7 years of making a gift.
- The cost of cover in either case will depend on your age, health and lifestyle, and the health of close family members may also be relevant.
- Once issued, the policy should be written in trust for the beneficiaries of your estate, or assigned to the recipient of the gift, to avoid the proceeds being subject to IHT as part of your estate.
IHT Efficient Investments
- Alternative Investment Market shares, Forestry Partnership investments, Enterprise Investment Scheme, Trading Companies.
- Must be held for 2 years to qualify for IHT relief.