How can I avoid or reduce my inheritance tax liability in the event of my death?
When making provision for your loved ones after your death it may be possible to reduce or avoid altogether liability to inheritance tax which may otherwise be payable. Lifetime planning is crucial.
Firstly and most importantly, have you made a Will? Has the Will been professionally drawn? A solicitor preparing a Will can advise you how best to take advantage of inheritance tax reliefs and exemptions in order to minimise any potential inheritance tax charge to your estate in the event of your death.
Are you able to make gifts in order to reduce the value of your estate for inheritance tax purposes? Individuals are able to give away £3,000 each per annum free of inheritance tax liability. Any unused allowance can be carried forward to the following tax year, thus enabling £6,000 of gifts to be made in the two year period. Therefore, in the case of a couple (whether spouses or partners), a couple can between them give away £6,000 per annum free of inheritance tax liability.
Do you have income which is surplus to your requirements? If so, you may be able to make regular gifts out of your surplus income in order to reduce the value of your estate for inheritance tax purposes. However strict conditions apply before the relief is available. If in doubt it is important that you seek professional advice if you believe that this relief may be relevant for you. It may also be important for you to retain full financial records for your executors so that they are able to demonstrate that the gifts were made out of your surplus income.
Individuals have available to them a tax free allowance (known as the nil rate band) for inheritance tax purposes, currently £325,000. Spouses would therefore enjoy the benefit of a combined nil rate band between them of £650,000. The nil rate band is the amount which can be given to a beneficiary other than a surviving spouse without incurring an inheritance tax charge.
If one spouse has died without using his or her entire nil rate band, then the balance may be available for transfer to the estate of the surviving spouse. For this reason it is particularly important that after the death of the first spouse the probate papers of the first spouse (including a copy of the Will, Grant of Probate and any inheritance tax papers) are retained as they may need to be relied upon by the executors of the surviving spouse in order to calculate the amount of nil rate band which applies for inheritance tax purposes upon the death of the surviving spouse.
If after the death of one spouse, a surviving spouse has remarried, then it may be possible to obtain the benefit of an additional (ie, a third) nil rate band for inheritance tax purposes depending upon the terms of his or her Will. Again, professional advice should be sought to ensure that full advantage is taken of any additional nil rate band which may apply for inheritance tax purposes.
In some cases, it is possible to vary the dispositions of a person’s estate after his or her death if suitable documentation is entered into within a period of two years after the individual’s death. It may be desirable to vary an individual’s Will eg, for inheritance tax planning purposes or because a beneficiary who would otherwise benefit does not need funds from the estate and would prefer to pass money/assets to other beneficiaries. However, strict time limits apply. In order to ensure that any variation of the estate is effective for tax purposes, the variation must be completed within the period of two years from the date of the deceased’s death. If in doubt, please seek professional advice in order to ensure that valuable inheritance tax reliefs or exemptions are not wasted.
With effect from 6th April 2017, a new allowance (known as the residence nil rate band) has been introduced. The additional allowance is £100,000 for an individual for 2017/18 (and therefore £200,000 for spouses), rising to £175,000 (or £350,000 for spouses) after 5th April 2020. However the legislation is extremely complex. In short, the relief applies where a property, which has been an individual’s residence at some point, is inherited by one or more direct descendants on death.
The allowance will be reduced where the net value of a deceased’s person’s estate exceeds £2 million. Therefore if the value of your estate is likely to exceed £2 million we would strongly recommend that you seek professional advice to discuss how best to structure your estate so as to ensure that your estate is able to take advantage of the maximum residence nil rate band available.
The residence nil rate band legislation is extremely complex. If you are in any doubt as to your own personal position, seek professional legal advice.