Inheritance Tax Planning

Inheritance Tax is tax charged on the value of your estate on your death. The first £325,000 of your estate is not subject to Inheritance Tax.  Anything in your estate which is over this threshold is subject to Inheritance Tax which is charged at 40%.

It is also paid on some lifetime gifts to some types of trusts, which are called ‘relevant property trusts’. Gifts during your lifetime to those trusts are taxed at 20%. Relevant property trusts are also subject to Inheritance Tax during their existence and on their termination.

Your ‘estate’ means everything you own, for example:

• Your home (and any other land property or buildings in your sole name or owned jointly);
• Investments such as shares and securities;
• Bank and Building Society accounts including ISAs;
• National Savings products such as saving certificates, premium bonds and pensioner bonds;
• Cash;
• Antiques, jewellery, paintings, your car, your furniture; and
• Anything else that has any monetary value whatsoever.

Other things that may also be brought within your estate for the purposes of calculating the Inheritance Tax due are:

• Any gifts made in the seven years prior to your death, unless they were made to your spouse or civil partner or a charity; and
• The value of any asset that you gave away in your lifetime where you still retained some sort of benefit, such as the income from the asset or use or enjoyment of the asset.

Any liabilities, such as your mortgage, overdrafts and bank loans are generally deductible for Inheritance Tax, so it is only the net value which is taxed.

If you own assets in the UK that exceed £325,000 then your estate may well have exposure to UK Inheritance Tax.

This in itself is a simple answer to a complicated question.

You may also have exposure to UK Inheritance Tax if you:

• Have made any gifts in the last seven years which once added to your estate result in a total value exceeding £325,000;
• Were born in the UK, are resident in the UK and your assets in the UK and aboard exceed £325,000;
• Have been a Income Tax resident in the UK during 15 of the last 20 years and your assets in the UK and abroad exceed £325,000.

If you are married or in a civil partnership (or widowed) and have children, however you may not have exposure to Inheritance Tax unless your (joint) estate exceeds £900,000 (2018/19).

As you can see, Inheritance Tax is a matter that is very specific to your personal circumstances. There are a vast number of rules, exemptions and reliefs that may apply in your particular situation.

Once your estate is worth over £325,000, you have a potential exposure to tax at 40% on the excess above that figure.

This simple illustration gives an indication of how the rules currently operate:

David and Barbara are married and have two adult children. They were both born in Surrey and have lived there all their lives. David and Barbara own all their assets jointly, and the total value of these is £1,600,000.

Their house, owned as joint tenants, is worth £1,000,000. They have savings in joint bank accounts totalling £200,000 and they have investments in joint names worth £400,000.

David died in November 2015 and due to the survivorship rules, Barbara inherits his share of their joint assets. There is no Inheritance Tax payable because gifts to spouses are exempt.

Barbara died three years later in July 2018; the composition and value of the estate has not changed, and she is survived by both her children. The inheritance tax calculation for her estate is as follows:

Net Value of Estate

Less Barbara’s nil-rate band: £1,600,000 (£325,000)

Less transferable nil-rate band from David’s estate (none of his nil-rate band was used on his death) (£325,000)

Less Residence Nil-Rate Band (an interest in Barbara’s home has been left to a child) (£125,000)

Less transferable Residence Nil-Rate Band from David’s estate (David died before 6 April 2017 so his Residence Nil-Rate band was not used on his death) (£125,000)

Amount subject to Inheritance Tax: £700,000

Inheritance Tax at 40% on £700,000: £280,000

The answer you will probably expect is ‘it is never too early’, and that is true. The earlier you start, the more effective your planning is likely to be, and the more options you have available to you.

You may not be at a stage in life where you think planning for Inheritance Tax is relevant due to your age, other financial commitments or level of wealth.

However even if you are young, unmarried and have no children, you may wish to think about making sure your nominations for any life insurance, death in service from your employer or lump sums payable on death from your pension are not structured in a way that they incur Inheritance Tax on your death or in the estate of those you have left them to in the event they become payable.

There are many occasions when you need to consider Inheritance Tax planning even if that is limited to reviewing your own Will, and those include:

• Cohabiting with someone you are not married to or in a civil partnership with;
• Getting married, or entering a Civil Partnership;
• Becoming a parent;
• Your children becoming mature enough to receive significant cash gifts;
• Marriage or Civil Partnership of your children;
• Becoming a Grandparent;
• Divorce;
• Inheriting from your parents;
• Death of your spouse or civil partner;
• Remarriage;
• Life expectancy of between seven and fifteen years;
• Life expectancy of less than seven years; and
• Immediately prior to death.

Much of the Inheritance Tax planning we advise on would require a life expectancy of at least seven years to be fully effective. If you are considering using trusts as a vehicle for this, in light of the benefits they can give, we would advise considering starting to plan a lot sooner.  However, there are situations where those with a life expectancy of less than seven years can still undertake successful Inheritance Tax planning measures.