Seven tips to reduce Inheritance Tax (IHT)
Inheritance Tax (IHT) is paid on an estate when somebody dies if the estate is worth more than the threshold (£325,000 in 2014/15). IHT is normally paid at 40% on the amount over this threshold, or 36% if the estate qualifies for a reduced because of a charitable donation.
Transferrable nil rate band between married couples and civil partners
Married couples and registered civil partners can pass assets to each other without paying IHT. Then when the second partner dies their nil rate band increases by the amount that their spouse didn’t use when they died. If none of the nil rate band was used on the first death there will be £650,000 nil rate band available on the second death. The first spouse or civil partner’s unused IHT threshold or ‘nil rate band’ is transferred to the second spouse or civil partner when they die.
Seven tips to mitigate IHT:
- Give away money or assets and live for 7 years: You can only do this if you can afford to, and you must be sure not to retain an interest in the asset you have given away. So for example if you give your children a holiday home then stay in it you must pay them the proper market rent. If you die within 7 years the asset comes back into your estate, and there may be tax to pay. If you die between 3 and 7 years after making a gift, and the total value of gifts that you made is over the threshold, any IHT due on the gift is reduced on a sliding scale. This is known as ‘Taper Relief’.
- Annual exemption: You can give up to £3,000 away each year, either as a single gift or as several gifts adding up to that amount – you can also use your unused allowance from the previous year but you use the current year’s allowance first.
- Small gift exemption: You can make small gifts of up to £250 to as many individuals as you like tax-free (but not to the people to whom you have given £3,000).
- Regular gifts out of surplus income: you can make gifts from your surplus income, but you have to show that you are left with enough to live on, and there has to be a regular pattern of giving.
- Business Property Relief (BPR): some non-listed investments, such as shares quoted on AIM (the alternative investment market) qualify for BPR. You only need own them for 2 years and they are free of IHT. Most Financial Advisors will sell you this type of investment. It is possible that this relief will be stopped in the future. These investments are by nature high risk
- Agricultural Property Relief (APR): If you own agricultural property and it is part of a working farm you may qualify for APR, in which case you get 100% relief from IHT. You must have owned the farm for at least 2 years, or 7 years if you let it out. This is a complicated area of tax law; you should always take specialist advice on your particular circumstances.
- Give to Charity: The amount given to the charity will be free of IHT. If you give more than 10% of your net estate to charity the balance of the estate will pay a reduced rate of IHT. Instead of tax at 40% it will be subject to tax at 36%. The net value of an estate is the total of all the assets after deducting any debts, liabilities, reliefs, exemptions and the nil-rate band. Therefore the gift to charity can be considerably less than 10% of the total value of the estate, and the estate will still qualify for the lower rate.