Does Inheritance Tax impact you?
Understanding Inheritance Tax (IHT) thresholds is crucial to know if you will need to plan for your loved ones to pay IHT on your assets after your death. Many individuals either fret unnecessarily about a non-existent IHT issue or remain unaware of its potential impact on their estate after they die.
What are the tax-free IHT thresholds?
In the United Kingdom, everyone holds a Nil Rate Band or tax free IHT threshold of £325,000 plus a Residence Nil Rate Band of £175,000 if you own your own home and plan to pass this on to your children or grandchildren, only.
The good news is that both of these allowances can be transferred between spouses, which means a married couple can leave assets up to £1 million before encountering IHT obligations on their estate.
What to do if you think IHT is applicable to you
For those anticipating an IHT impact, several legal methods can mitigate liabilities. Crafting and regularly updating a Will is a significant step in the right direction.
Many people assume that your assets will pass automatically to your loved ones after you die, but this isn’t guaranteed, so a Will is an essential tool for ensuring your loved ones are looked after after your death.
A Will ensures you have control over who gets what from your estate, including property, cash, and everything else you own, and crucially starts the process of reviewing your potential inheritance tax liabilities.
What about gifting in your lifetime if you think IHT applies to you?
Gifting in your lifetime is a very common and popular tool to help reduce potential IHT liabilities.
You have £3,000 a year you can gift out of your surplus income per person. Surplus income means that any cash gifts made do not impact your standard of living.
Furthermore, the cash gift can happen on a frequent basis, say monthly to a grandchild’s savings account to demonstrate to the tax authorities that it is a legitimate gift out of your estate.
What’s really important here is to maintain really good records when making gifts.
Gifting assets, such as property, is a little more complex, and professional advice should be sought. In some cases, gifting a property during your lifetime doesn’t necessarily mean it won’t be included in your estate for IHT purposes.
Your biggest asset may also be your own home but gifting this to your children in your lifetime so as to remove the property from your estate and therefore no IHT is due, means that you give up all access and benefits to the property. Therefore, you can’t gift the property formally in a legal trust, for example, and then continue to live in it, expecting no IHT to be due.
Another strategy that is common but doesn’t always work is to sell your property to a loved one below the market price. HMRC at the time of calculating the IHT liability on your estate will look at the market value of the property and not necessarily the price you sold it for. Also if you die within 7 years of the sale or gift, there may well be IHT still due.
We can help
Mirandus is a registered Trust & Estate Planner (TIP) and Chartered Tax Advisory practice and offers complimentary consultations if you believe you are over the IHT thresholds and need to do some tax planning to help mitigate your IHT position. Please get in touch to see how we can help.
