Inheritance Tax Planning Knowledge & Resources

Inheritance tax is a tax which is potentially payable when a person dies.

Not every estate has to pay inheritance tax. It depends on the value of that estate and in many cases who the beneficiaries of the estate are.

Yes, each individual in England and Wales has a tax free allowance for inheritance tax which is known as the nil rate band. It is currently set at £325,000.

It is possible for married couples to use both individuals nil rate band on the second death. When the surviving spouse dies and if the first spouses nil rate band can be used, it is transferred to the surviving spouse’s estate and calculated for inheritance tax.

It is important that to keep the correct papers such as a marriage certificate, the Will of the first spouse to die together with any grant of probate or letters of administration together with a breakdown of that persons assets at the date of death and whether any inheritance tax was payable at that time.

If you make a gift of more than £3,000 during your lifetime to another individual, then you must survive for seven years. If you die within that period, the value of the gift will potentially be chargeable to inheritance tax.

If an estate if subject to inheritance tax, the tax has to be paid within six months of the date of death.

The annual allowance currently stands at £3,000, which means you can gift up to £3,000 to your children (or to anyone else you choose) in this tax year without any inheritance tax (IHT) implications. It is important to bear in mind that this £3,000 limit applies as a total and per person, so you would need to split the £3,000 between your children (i.e. it is not £3,000 to each of them) if you wanted the money to remain exempt from IHT. However, if you have not used last year's allowance, you can gift £6,000 this year and still avoid IHT issues.

If you find that you are living well within your means, and at the end of each tax year you have surplus income, then you should consider making regular (monthly) gifts out of your income to your children (or anyone else you choose) to avoid the surplus income increasing the size of your estate for IHT. You will need to keep detailed records of your income for each tax year, the gifts made from it and your expenditure in that same period to make it easier for your executors to claim this relief after your death.

If you make a gift which is in excess of your annual allowance, and do not survive for a period of seven years from doing so, then the value of the gift will be brought back into account for inheritance tax (IHT) purposes. For example, if you were to give away £200,000 to your children and only lived for another three years from doing so then your IHT threshold, known as the Nil Rate Band, would effectively be reduced by that amount. If you make a gift which is in excess of your Nil Rate Band, which is currently £325,000, then taper relief is available against the value of the gift after a period of three years. It is worth noting that the recipient of such a gift is liable for the IHT payable on it, unless your Will says otherwise.

Often people will get so preoccupied with the thought of the taxman getting their hands on a large chunk of an estate that they have worked so hard to build up, that they forget about making sure that they have enough money for the rest of their days. Make sure that you take professional advice (we can recommend a suitable independent financial adviser and/or accountant) before parting with an asset or what to you is a large sum of money. You have to be prepared to say goodbye to whatever it is you are giving away.

Unless you have a significant amount in savings it is likely that any value tied up in your home will be the main asset that will push your estate over the Nil Rate Band. Speak to us before you go ahead with transferring your house to your children, or selling it to give them the cash, as you need to be aware of all the issues surrounding such a gift.

Prior to October 2007, and the introduction of the Transferable Nil Rate Band, it was better from an IHT perspective for spouses and civil partners to have Wills in place which made use of all or part of the first to dies Nil Rate Band (by way of a legacy to children or to the trustees of a Nil Rate Band Discretionary Trust) to ensure that it was not being lost in the spouse exemption. Contact your lawyer if you have a Will that does this because, under the current rules, in most cases it is better to pass the entire estate to the surviving spouse (thus keeping the first to dies Nil Rate Band if they have not made any gifts in the seven year period before their death) and for the surviving spouse to then make lifetime gifts to the children, or anyone else, from the whole estate.

If you put things into a trust then they no longer belong to you. This means that when you die their value normally won’t be counted when your IHT bill is worked out. A trust can be used to benefit those who are too young or unable to manage their own finances, for life polices to keep the proceeds outside of the survivor’s estate, or as a way of protecting assets for the beneficiaries, as whilst they remain in the trust they will not be considered part of that beneficiaries estate for IHT, probate, or means tested purposes, and can be better protected against claims from creditors or a soon to be ex-spouse or civil partner.