Tax Planning for your inheritance
It’s a tricky but important topic. Have you given the tax implications for your inheritance enough attention? Deborah Adams, Director of Private Client Services at Parnalls Solicitors, explains what you need to think about when planning for your inheritance if you wish to minimise your tax bill (and we assume you do!).
Inheritance tax: what you need to know
Planning how to deal with your assets in a tax efficient manner is an important but potentially complex task. An increasing number of estates will be liable to inheritance tax (IHT) on a person’s death, so it is vital to consider how your will can be drafted to reduce the amount of tax that will be taken from your estate after you die, freeing up more money for your loved ones.
You can also consider whether to make gifts during your lifetime to minimise your IHT liability but this raises other tax considerations. Why should I think about tax now?
The IHT threshold for an individual is £325,000 (also known as the nil rate band) so if your estate is worth more than that on your death, the value of your estate in excess of £325,000 could be taxed at 40 per cent. Many estates will exceed this threshold, particularly given the steep rise in property prices over recent years.
How can my will reduce IHT?
You can utilise various available tax reliefs and exemptions in your will to reduce the tax bill on your death, including:
- Spouses and civil partners: gifts made to your spouse or civil partner are exempt from IHT, so the value of any property or share in a property left to your spouse or civil partner will not be taken into account for the purposes of IHT;
- The transferable nil rate band: if you survive your spouse or civil partner, the basic threshold available for your estate can be increased by the percentage of the threshold unused when they died. For example, John died leaving an £600,000 estate. He left £130,000 to his son and John’s wife inherits the balance. Only £130,000 out of the £325,000 threshold was utilised, so the unused 60 per cent (£130,000 is 40% of £325,000) is transferrable to the wife’s estate. On her death, her total IHT threshold will be £520,000 (£325,000 plus £195,000);
- The residential nil rate band: an additional allowance is available if you leave one residential property to your direct blood descendants, such as your natural children and grandchildren. This is currently £125,000 rising £25,000 each year to £175,000 in 2020/2021. If you own more than one residential property your executors will nominate which one will qualify;
- The transferable residential nil rate band; is a complicated area but works in a very similar way to the transferable nil rate band and can have the effect in certain circumstances of doubling up the residential nil rate band on the death of a spouse/civil partner.
- Charities: gifts made under your will to UK charities and political parties are also exempt from IHT; and
How else can I reduce my tax liability?
If funds allow, consider making gifts during your lifetime to reduce the value of your estate and the potential IHT liability on death. You can make as many gifts of £250 to anyone you like without them being liable for IHT. You also have an annual exemption of £3,000, so you can give up to £3,000 to someone without incurring IHT (or £1,000 each to three people);
You could also consider making larger gifts known as a ‘chargeable transfer’. Although IHT may be payable if you die within seven years of making the gift, the potential tax decreases each year until it falls outside of your estate after seven years. This is also called a potentially exempt transfer (PET).
Are there other tax implications?
Tax planning for inheritance must include consideration of other taxes, notably capital gains tax (CGT) which can be a trap for the unwary. Importantly, CGT liability dies with the individual, but it may arise if you make lifetime gifts.
A gift of property (other than your main home) or an expensive work of art could, for example, give rise to CGT on the increase in value since you acquired it. This means that whilst a lifetime gift would reduce your IHT liability on death, it could incur an immediate CGT bill when the gift is made. You need to carefully consider whether it makes more financial sense to make a lifetime gift and pay a CGT bill now, or deal with it in your will and potentially pay IHT on your death. There could also be a double trap of paying CGT on a lifetime gift and if you do not survive 7 years also an IHT problem as it would be a failed potentially exempt transfer.
Finally, there may also be income tax considerations if you create a trust, as the income from a trust fund is liable to income tax.
This is a highly complex area of law, and to find out about how best to navigate the tax implications you should see a specialist solicitor who specialises in inheritance tax planning.
For further information, please contact Deborah Adams, Director of Private Client Services at Parnalls Solicitors on 01566 772375 or email firstname.lastname@example.org
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.
Coronavirus (COVID-19) and Commercial Property Legal FAQs
Rent Charge Suspensions: Protecting Your Interests
Been Asked to Sign an Employment Settlement Agreement? Seek Advice Urgently...
Services Update: Continuity of Legal Service Provision
Advising You in Uncertain Times
Could carelessness on social media land you in court?
Is an electronic signature on a commercial property document acceptable?
What happens when there is no health & care LPA in place
Social Media Training for Businesses
Information to gather for your probate solicitor
Gazundering, what it is and how to avoid it
Relief from forfeiture – what happens if the tenant forgets to pay the rent?
Not so safe at work - compensation for an accident at work
New organ donation law: giving you control
Running a business from home
Have nude photos of you or your teenager been posted online?
Landowners’ rights and the Electronic Communications Code
Building in your back garden
Christmas is a time for giving (and inheritance planning)
Buying the freehold of your leasehold house
Redeveloping an empty pub for commercial use
Why it takes time to obtain the Grant of Probate
Social Media: The unconscious privacy threat
Is your reputation being threatened?
Making a will after your spouse or partner has died
Interns celebrate completion of internship at solicitors
Selling your home in a flat market, some top tips
Claiming compensation for a serious road traffic accident
New Media and Communications Court list reflects surge in internet defamation claims by Laura Baglow
Has your personal information been shared without your permission?
Planning your escape to the country, what you need to consider – part 2
Government consultation on new national model for shared ownership
Choosing a partnership structure
Planning for what happens when you die by Deborah Adams
Changes to legislation could offer protection for tenants in the private rental sector
Move to the country - Part One
The risks of DIY probate
Will your septic tank still be legal in January?
The death knell for ‘kiss and tell’?
Making a will when you retire
Selling your property at auction
Not looking so good - your guide to compensation for botched non-surgical cosmetic procedures
New threshold of seriousness in defamation proceedings
Legal considerations when building a granny annex
Choosing the right person for your power of attorney
Formal Interviews - Do you need legal representation?
Privacy rights and aerial images
Trustees’ duty to give information to beneficiaries
Five problems with a leasehold property
Taking your first commercial lease
Is your organisation protected from employee social media legal risk?
Have you been targeted by negative social media posts?
Farmers be alert when being inspected
Help for House Sellers?
Don’t let your digital assets end up in a digital grave
Valuing an estate for probate
Development proposals and your local authority search
What can you do if your child is injured in a serious accident
NetRights welcomes new protection for social media users
SHOULD I GET A LAWYER FOR A SPEEDING OFFENCE?
Supreme Court recognises that social media is a “casual medium” in libel battle
Choosing the best conveyancer who is right for you
Making a will after a second or subsequent marriage
Option or promotion agreement – which is best for landowners?
Anonymous pub and restaurant online reviews leave a bad taste
Have you had an accident involving a horse?
Help to Buy – beware of some cracks in the structure
Understanding Lasting Powers of Attorney
Changes to Energy Performance Certificate for Landlords
Had a cycling accident? Your route to obtaining compensation
New year, new home: tips to sell your home in the New Year
Tax Planning for your inheritance
Hearing loss: when your employer may be liable
Buying a home for your retirement, five things you need to consider
Farmers plan to diversify after Brexit
Ministers press ahead with probate fee shake-up - reports BBC News
Botched dental treatment? You may be entitled to compensation
Why a Health and Welfare Power of Attorney is a good idea
Will the new charge on building developments in Cornwall affect you?
Energy Performance Certificates – Do They Matter?
HMRC Challenging Stamp Duty Land Tax Payments
Ben Mitchell qualifies as a solicitor
The potential implications of Brexit on employment law
Appointing a guardian for your children
Houses in multiple occupation – new rules from October 2018
New Agriculture Bill published
Will Brexit affect my pension?
Dreaming of a holiday home? Sort out the legals before putting your feet up
Lasting Power of Attorney by Deborah Adams
Settled status after Brexit by Alexis Hager
How to choose an executor to administer your estate when you die
How overage agreements can boost profits from your land
Top tips for first-time buyers
How Could Brexit Affect My Farm?
Wills & Succession in Spain by Deborah Adams
Brexit – an international and local view by Alexis Hager, Litigation
Capital gains tax - important facts for non-residents of the UK
Buying a home: the importance of making sure the seller is entitled to sell
Changing a will after someone has died: it is possible and it could save you money
Your responsibilities when you have people working in your home
Sad passing of Battle of Britain pilot who served with Parnall family member
Considerations when buying a heritage property
Disciplinary proceedings at work: guide for employers
Employers should have a disciplinary process in place, but just following this may not be enough to avoid falling foul of the law and exposing yourself to the risk of an employment tribunal claim.