The Chancellor Philip Hammond has recently announced a review of Inheritance Tax by the Office of Tax Simplification to strive for a simpler, fairer and better system.
Currently UK domiciled and UK resident individuals are subject to Inheritance Tax (IHT) on chargeable transfers during an individual’s lifetime and on an individual’s estate on their death.
On death, IHT is paid on the value of an individual’s estate ie the sum total of all their assets from property, investments, cash, chattels (eg jewellery, artwork, home contents, and vehicles).
Each individual has a Nil Rate Band (NRB) of (currently) £325,000 on which IHT is charged at 0%. Estates with a value of more than £325,000 pay IHT at 40%.
An additional Residence Nil Rate Band (RNRB) is available for an individual who dies on or after 6 April 2017 and leaves an interest in a property to their direct descendants. The RNRB is currently £100,000 rising to £175,000 by 2020/2021. Estates valued in excess of £2m will have a tapered RNRB.
Spouses/civil partners who transfer all their assets to the surviving spouse, or the deceased spouse who has unused NRB remaining, can transfer the balance of the NRB to the surviving spouse. There is potential therefore for the surviving spouse to have a NRB of up to £850,000 and estate values within this limit will pay no inheritance tax. From 2020/2021 this will increase to £1m when the Residence Nil Rate Band is in full swing.
There are a number of planning opportunities to help mitigate Inheritance tax although these are no longer as generous as they once were. Individuals have annual exemptions available in respect of gifts to charities; small gifts of up to £250; gifts on marriage; gifts of up to £3,000 per annum; gifts of normal expenditure out of income etc.
Gifts made during an individual’s lifetime to another individual are potentially exempt transfers providing the donor survives 7 years. Surviving 7 years following the gift results in the asset falling out of the individual’s estate and exemption from IHT. Where the donor doesn’t survive 7 years, IHT is payable by the recipient, although there is a taper relief available where more than 3 years has passed since the gift.
Gifts were the donor retains the benefit of the asset is a Gift with Reservation of Benefit ie gifting a home to children but still living in the property are not treated as a PET and the asset will remain within the estate and therefore subject to IHT on death.
Other planning opportunities include creating a trust(s). Trusts can offer protection to assets where the beneficiaries are too young to manage the assets or guarantee succession of assets where the settlor wants to ensure the intended beneficiary of the asset does actually receive the asset in the future. There are a number of different types of trust depending on whether the beneficiaries are to automatically receive income from the trust assets or whether income will be distributed at the trustee’s discretion.
As you can see a simplified IHT system would be very much welcome, however in the meantime if you need any help with IHT issues please do not hesitate to contact us.