Notwithstanding politician’s promises and some jiggery-pokery around IHT on the family home the tax take on Inheritance Tax has been rising for some time. Back in 1980/81 the total IHT take was under £0.5bn, in 1990/90, it was under £1.5bn, in 2000/01 it was under £2.5bn, in 2008/09 is was over £3.5bn and in 2015/16 it was over £4.5bn. As a proportion of GDP, (Gross Domestic Product), in 1980 it was under 0.17%; in 2007/08 and 2015/16 it was over 0.25%, so its influence over government receipts has been rising significantly. (Original data from HMRC Tax & NIC receipts, monthly and annual historical record, 21st June 2016).
For a family just after a death, IHT comes as a nasty shock; most assets cannot be distributed until after probate and probate cannot be granted until the IHT bill has been settled or HMRC knows exactly where the money is coming from. For the executors, paying the tax due can be a major headache, sometimes all that can be done is borrow from a bank and pay off the loan as fast as possible.
It really should not be like that; for most intents and purposes, IHT is a “voluntary” tax, as the Nil Rate band is £325,000 per person in 2016/17 and there is a well-travelled path to reduce your liability for tax.
So what do you do to reduce or eliminate the potential tax bill?
Jointly held assets and succession
Jointly owned assets like a house or an investment bond will automatically pass to the survivor without troubling the IHT calculation. This is one of the key reasons why the first death in a married couple or a civil partnership is not a huge issue. The tax complications kick in on the second death, when there is no one the asset can succeed to.
Exactly what it says on the tin. Spend your assets, so your estate is worth less than the remaining nil rate bands. For a married couple or civil partnership, this is currently £650,000, (2016/17) with promised additional allowances in April 2017 towards the family home. By 2020/21, £1Million will be in the nil rate band, provided the family home is included.
Give it away
The tax man gets interested if you pass your assets to others before your demise, so giving it away before death has strings attached. If you die within seven years of a gift being made, some tax could be payable, as the asset is not fully out of your estate. As a general rule, giving it away requires you to treat it at arm’s length, so once it has gone, you cannot get it back, so living in a house you have given away, without paying a market rent, will not be a true gift, recognised by HMRC for IHT purposes.
With financial assets, you can get a three way choice; just pass it on, or you can retain the capital and give away the interest, or you can retain the income and give away the capital. This can work well for parents with children and grandchildren who need to retain the income to live or the capital for comfort.
Some gifts are exempt of all these details, but the values are comparatively low; full details are available on the Money Advice Service website, https://www.moneyadviceservice.org.uk/en/articles/gifts-and-exemptions-from-inheritance-tax.
Provide for it
In simple terms, put the capital aside or set up a life policy to pay the tax bill. There are two standard approaches with life policies; set up a whole of life plan, to provide a lump sum, whenever needed or use a specialised 7-year life policy to meet the cost of an earlier than expected death, before the other measures taken have become effective. In either case, the insurance policy should be in trust, to keep the proceeds from becoming liable to tax.
For anyone planning to reduce or eliminate their potential IHT bill, think in 7 year cycles as some gifts can be subject to IHT at lifetime rates, (20%), if the total of gifts is greater than the lifetime allowance. To avoid all tax payments, give away £325,000 worth of assets every 7 years, until you have got your total assets under the nil rate band.
This sort of tax planning is a common activity for financial advisers like ourselves, so if you would like to explore this further, please get in touch.
If you would like to know more about how we can help you plan and realise your financial goals then contact us at firstname.lastname@example.org or call us on 01223 792 196.
The information contained is for guidance only and does not constitute financial advice. It is based on our understanding of UK legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Accordingly no responsibility can be assumed by Martin-Redman Partners its officers or employees, for any loss in connection with the content hereof and any such action or inaction.