Inheritance Tax (IHT) is a tax on the value of an individual’s estate at the time of their death. The current threshold for IHT in the UK is £325,000, and anything over this amount is taxed at a rate of 40%. A further £175,000 might be available if the property used as their personal residence is left to direct descendants.
For further details, check out our guide to the latest tax rates and allowances.
However, there are several good practices that individuals can adopt to help minimise the impact of IHT on their estate and their heirs:
1. Use the IHT annual gift allowance. Individuals can give away up to £3,000 each year without it being subject to IHT. Additionally, they can give away up to £250 to any number of people each year. These gifts can help reduce the value of the estate over time and reduce the IHT liability.
2. Know the various exemptions and reliefs that are available. For example, gifts to charities and political parties are exempt from IHT, as are gifts between spouses or civil partners. There are also reliefs available for assets such as agricultural land and business property, which can help reduce any IHT due on the overall value of the estate.
3. Trusts can also be a useful tool for IHT planning, to protect assets and provide financial security for a beneficiary (i.e. minor child, surviving spouse, etc.). A trust is a legal arrangement whereby assets are transferred to a trustee to manage on behalf of beneficiaries. There are several types of trusts available; the choice will depend on the wishes of the person (settlor) giving the assets and the circumstances of the beneficiaries.
4. Careful estate planning can also help reduce the impact of IHT. This should involve the writing of a Will which will stipulate how the assets of the deceased will be distributed, while minimising the IHT payable. Gifts of assets during their lifetime can also reduce the IHT due. This will depend on the value given when the gift was made, to whom and in what form.
5. It is always important to keep accurate records and documentation to support any IHT planning. This should include documentation of gifts made, valuations of assets and records of any trust arrangements. Having these documents in order can help ensure that the individual’s wishes are carried out and reduce the risk of disputes or challenges to the estate.
Before undertaking any kind of tax planning, professional advice should be sought to ensure that the proposed transactions or future plans will meet their wishes, comply with the law and regulations. Please get in touch with Michele, our resident expert, if you require any further guidance…