Inheritance Tax Planning

Inheritance Tax (IHT) is charged at the rate of 40% on the value of anyone's estate above the nil rate band thrsehold, which currently stands at £325,000.00. There are two ways to make plans for your future to reduce your inheritance tax liability: either in your Will (upon your death) or during your lifetime.

Inheritance Tax Planning in Your Will

It is possible to draw a trust in your Will that will help reduce any IHT payable when you die. This is known as a 'nil rate band discretionary trust'. There are still valid reasons for creating such a trust, such as:-

It will protect assets from business creditors or divorce settlements.
Assets in the trust will not be taken into account for means testing if your spouse needs to go into a nursing home.
The assets may increase in value faster than the nil rate band (which could by future legislation even be frozen or reduced).
It will protect the intended ultimate beneficiaries, for example if the surviving spouse remarries without making a new Will

Talking through these choices with one of our Solicitors will allow you to feel secure in the knowledge that you have prepared for your future.

Inheritance Tax Planning During Your Lifetime

Minimising inheritance tax using lifetime gifts

Provided that you can afford to do so, giving away assets is a very effective way of reducing the value of your estate – and so reducing any eventual IHT payable.

Although gifts made during the seven years prior to your death are included in your estate, there are several exemptions that allow you to immediately reduce the value of your estate:

You have an annual exemption allowing you to give away up to £3,000. You can carry this exemption forward for one year if you do not use it.
You can also make small gifts of up to £250 to as many individuals as you like. However, you cannot use both this exemption and the annual exemption to make gifts to the same individual.
Special exemptions apply to gifts made to individuals getting married (or registering a civil partnership). You can give up to £5,000 to a child of yours, £2,500 to a grandchild, or £1,000 to anyone else.
Any gifts to your spouse (or registered civil partner) are exempt.

Importantly, regular gifts out of income that do not affect your standard of living are exempt. This can be of significant value if you have a substantial income. For example, you might make regular contributions to a life insurance policy to help cover the IHT that you expect to be payable when you die.

Gifts of capital for the maintenance of dependants e.g. children, former spouses and disabled relatives) are also exempt.

Making Potentially Exempt Transfers (PETs)

Lifetime gifts that are not covered by one of the exemptions, and are not gifts into a trust are potentially exempt transfers (PETs). Provided that you survive for at least seven years, the gift will no longer be included within your estate and no IHT will be payable.

If you die within seven years, IHT is calculated on a sliding scale. After seven years no IHT is payable.

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