Inheritance Tax Planning Guide

It is more than likely that you will want to have some say in what happens to your money and assets when you die. However, even on death you, or rather your estate may still have to pay tax. In the 2014/15 tax year, everyone is entitled to leave an estate valued up to £325,000 without their beneficiaries paying tax on it.

The amount is set by the Government and is called the nil-rate band, because it’s the amount you pay a ‘nil-rate’ of Inheritance Tax (IHT) on. Above that amount, anything you leave behind is subject to a tax of 40% (or 36% if you leave at least 10% of your assets to a charity). So for example, if you leave behind assets worth £750,000, your estate pays nothing on the first £325,000, and 40% on the remaining £425,000 if you’re not leaving anything to charity which amounts to £170,000.

Officially, the £325,000 limit has been frozen until at least 2017/18, when the Government will look at whether to increase it. There are hopes that the threshold will be increased to £500,000, but whether those proposals come into being is far from certain.

Macbeth can advise you on how best to manage your assets and investments for a better financial future – which can extend to beneficiaries, such as offspring and loved ones.

By planning ahead, you can therefore control and limit the effect that IHT can have on your chosen beneficiaries.
Some of the options are fairly simple, while others can include more complex schemes including gifts to family members or setting up trusts.

It’s also worth noticing the checking the value of your estate every year, assets like property and investments can change fast and the value of your estate could move above the Inheritance Tax Threshold without you noticing.

Five things you can consider around Inheritance Tax Planning:


Make a Will:

Having a Will means you avoid relying on the intestacy rules that come into play where there is no Will. If you don’t draw up a Will, you are leaving your surviving spouse or executors at risk of considerable financial anxiety and costs. You should then review this Will on a regular basis and update it, as and when your circumstances change. This will allow you to set in place an ongoing structure to ensure that no more Inheritance Tax is paid than is absolutely necessary.

Take full advantage of the available spouse exemption and spouse relief:

Significantly, it should be remembered that if you are married or in a registered civil partnership, IHT rules allow partners to ‘inherit’ any unused allowance up to £325,000 depending on what has been used by spouse/civil partner. The surviving partner is now allowed to use their own tax free allowance and any of the balance of the nil-rate tax band not used on the death of their partner.

Make full use of all allowances:

Any gifts you make to individuals will be exempt from Inheritance Tax as long as you live for seven years after making the gift (known as potentially exempt transfers ‘PETs’).There is some relief if death occurs in the seven year period where gifts exceed the Nil Rate band.

You are also entitled to give away up to £3,000 tax free each year. If this annual exemption allowance is not fully utilised, it can be carried forward to the following tax year. Likewise full use should be made of the unlimited number of £250 gifts and gifts out of normal habitual expenditure.

Avoid retaining beneficial interests:

If you transfer an asset, such as a house, it is essential that you do not retain a beneficial interest. If an interest is retained, the gifted asset (known as a gift with reservation) is still treated as part of your estate for Inheritance Tax purposes.

Newly introduced legislation has stopped the use of sophisticated schemes, such as life interests and double trusts, to avoid the gift with reservation rules. If you have one of these schemes in place, you should let your financial adviser know, so they can provide professional advice in considering the alternative options.

Make use of trusts:

Trusts can offer extra flexibility in your IHT planning. For example, a family trust can be used to provide a lifetime income for your spouse but with the assets passing to your children, or to help protect ownership of a family business.

You could consider using a specialised trust such as a Discretionary Will Trust to mitigate your potential tax liability.A trust is a legal arrangement that allows you to give away assets such as money, property or shares in a tax efficient manner and on terms determined by you to beneficiaries chosen by you.

In many situations a Macbeth Financial Adviser will work with lawyers and solicitors to ensure that any trusts are personalised to suit your specific circumstances and will be happy to discuss this further with you.

Learn more about our financial services for private clients

Author: Simon Claxton | January 12, 2015

Contact the author

Related Articles

Talk to us today: Reading: 0118 916 5480 London: 020 7036 8767