Inheritance tax (IHT) is a tax that is paid to the Inland Revenue generally on death (although it can be due in your lifetime) normally where the value of an estate exceeds the ‘Nil Rate Band’. The Nil Rate Band is currently £325,000.00 and has not changed for the last few years. The government recently announced that the Nil Rate Band will be fixed until 2021.
Under current legislation, a surviving spouses’ estate may be able to claim the Nil Rate Band of the first spouse to die, on the death of the second spouse, as well as the second spouses’ own Nil Rate Band. This is called the “transferable nil rate band” procedure. This potentially gives many estates a tax free allowance of £650,000, although this figure may be reduced if either spouse has made lifetime gifts in the seven years before their respective deaths.
Even with the increased allowance afforded by the transferable nil rate band many couples find, due to the value of their homes, that their estates will still attract an Inheritance Tax bill after they die.
You can in your lifetime mitigate your exposure to Inheritance Tax on death, by giving assets away. This of course must be subject to you being able to afford to do so. There are certain conditions and rules to meet regarding gifts and there are also some special reliefs available to certain qualifying assets. For a list of current IHT exemptions which you can take advantage of please use the link opposite.
We can advise you whether you have an exposure to Inheritance Tax based on the value of your estate (calculated on the information you give to us), calculate your potential liability and advise you about the exemptions for Inheritance tax which may apply to you. We can also discuss with you whether you would benefit from re arranging any of your assets, or if you qualify to pay Inheritance Tax at a reduced rate based on the terms of your Will.
We generally charge an hourly rate of £240 inc VAT for IHT advice although some of our asset and wealth preservation packages include this advice as part of the fee.
Annual exemption
Gifts worth up to £3,000 in total per tax year (plus any unused part of the exemption from previous year but you must use the current year's allowance first).
Small gift allowance
Up to £250 per donee (to as many individuals as you like). You can't use your small gifts allowance together with any other exemption when giving to the same person.
Wedding and civil partnership gifts
Wedding or civil partnership ceremony gifts are gifts exempt from Inheritance Tax, subject to certain limits :
- parents can each give cash or gifts worth £5,000
- grandparents and great grandparents can each give cash or gifts worth £2,500
- anyone else can give cash or gifts worth £1,000
You have to make the gift - or promise to make it - on or shortly before the date of the wedding or civil partnership ceremony. If the ceremony is called off and you still make the gift - or if you make the gift after the ceremony without having promised it first - this exemption won't apply.
Regular gifts or payments out of income
Any regular gifts you make out of your after-tax of income, not including your capital, are exempt from Inheritance Tax. These gifts will only qualify if you have enough income left after making them to maintain your normal lifestyle.
This exemption is claimed retrospectively by your Executors after your death and as such it is very important that you keep a record of your income and expenditure in order that your Executors have this information available to submit to the Inland Revenue after your death.
Additionally you should be aware that the Revenue do not allow some receipts to be treated as income. As the rules are complex we have provided some further information in relation to this exemption which you can find below.
Potentially exempt transfers
If you survive for 7 years after making a gift to someone, the gift is generally exempt from IHT, whatever the value. However, if you have retained any interest in the gift made, for instance by continuing to receive dividends on shares given, or continued occupation of a property after gifting it, then you will be caught by the "Gifts with Reservation of Benefit" rules. If you think this may apply to you we recommend you contact us for bespoke advice about your situation.
Nil Rate Bands
The "Ordinary" nil-rate band for Inheritance Tax in the tax year 2019/20 is £325,000.00. Remember, if you are a surviving spouse you may qualify to receive a transfer of your deceased's spouse's nil-rate band when you yourself die. If you want more information about this please call us to make an appointment to discuss your individual circumstances.
Individuals with direct descendants who have an estate including a main residance with total assets above the Inheritance Tax (IHT) threshold (or nil-rate band) of £325,000 will receive their "Ordinary" nil-rate band and an "Additional" nil-rate band when a residence is passed on their death to a direct descendant.
The value of the Additional nil-rate band has increased yearly as follows :
- £100,000 in 2017 to 2018
- £125,000 in 2018 to 2019
- £150,000 in 2019 to 2020
- £175,000 in 2020 to 2021
The additional nil-rate band will also be available when a person downsizes or ceases to own a home on or after 8 July 2015 and assets of an equivalent value, up to the additional nil-rate band, are passed on death to direct descendants.
The "additional" Nil Rate band will take effect for relevant transfers on death on or after 6 April 2017.
The qualifying residential interest is limited to one residential property but personal representatives will be able to nominate which residential property should qualify if there is more than one in an estate. A property which was never a residence of the deceased, such as a buy-to-let property, will not qualify.
A direct descendant is a child (including a step-child, adopted child or foster child) of the deceased and their lineal descendants.
If the net value of the estate (after deducting any liabilities but before reliefs and exemptions) is above £2 million, the additional nil-rate band will be tapered away by £1 for every £2 that the net value exceeds that amount.
Further information on gifts out of normal expenditure (gifts out of excess income)
The main requirements for the normal expenditure out of income exemption are :
1. Gifts must form part of normal expenditure
HMRC's interpretation of this requirement is that the gifts should form part of a regular pattern of payments. Alternatively, the exemption may be available where it can be shown that you have had made a firm commitment regarding future expenditure.
2. Gifts must be made out of income
The exemption will only apply where expenditure is from surplus net taxable income. This EXCLUDES amounts such as:
- the capital content of a purchased life annuity;
- any withdrawal from a life assurance investment bond;
- capital sums from the sales of investments;
- maturity proceeds from endowment policies;
- inheritances; and
- lottery winnings
The following are examples of taxable income that count as income for this purpose:
- net salary;
- dividend income from shares, unit trusts, OEICs and investment trusts;
- net interest paid on bank and building society accounts;
- net interest from gilts and corporate bonds;
- withdrawals from unsecured pensions or alternatively secured pensions; and
- net rental income.
You must take care where income has been accumulated. HMRC will normally allow amounts that have been saved temporarily to be treated as income. The Revenue's own IHT manual says that its employees should resist claims for "gifts made out of several years' accumulated income".
The following are examples of taxable income that count as income for this purpose:
- net salary;
- divident income from shares, unit trusts, OEICs and investment trusts;
- net interest paid on bank and building society accounts;
- net interest from gilts and corporate bonds;
- net pension income;
- withdrawals from unsecured pensions or alternatively secured pensions; and
- net rental income.
You must take care where income has been accumulated. HMRC will normally allow amounts that have been saved temporarily to be treated as income. The Revenue's own IHT manual says that its employees should resist claims for "gifts made out of several years' accumulated income".
3. Sufficient income must remain to maintain your standard of living
Gifts must be made from true 'surplus' income and you must retain enough income to maintain your usual standard of living. The Revenue's own IHT manual says the following with respect to this - "consider income [for this purpose] as net income after payment of income tax. Income is not defined but should be determined in accordance with normal accountancy rules; it does not necessarily coincide with income for income tax purposes".
The amount of an individual's surplus net income is likely to fluctuate from year to year. The value of regular gifts can also vary and still be exempt, providing the other qualifying criteria are met.
4. You must not receive any benefit from the gifted amounts
As with most Inheritance tax related gifts, you must not be able to receive any future benefit, either directly or indirectly, otherwise the gifted amounts will not fall outside of your estate.
The gifts of out income exemption is in addition to the £3,000 annual exemption and other lifetime exemptions that can be claimed.
This information is provided for illustrative purposes only. It should not be relied upon by existing, past, future or proposed clients who should always seek further clarification in relation to their own individual circumstances. WILLS JACOBSEN LEGEL accepts no liability for any loss arising as a result of anyone relying on the above information.