Inheritance tax (IHT) is payable when the taxable value of your estate, including your home and any gifts you made in the 7 years before your death, is above the tax free band (£325,000 – 2018/19). The tax is currently 40% on everything above this limit (36% if you leave at least 10% to charity).
However, if you are married or in a civil partnership your whole estate can transfer to your surviving partner tax free after your death, but the survivor may still be liable to IHT when they die. You can however transfer any unused portion of your tax free IHT band to your spouse or civil partner when you die.
IHT may also be payable whilst you are alive and if you make gifts that value more than your available tax free band, for example gifts into trusts.
You should keep records of any gifts and transfers to ensure your IHT liability is calculated correctly after you die.
Residence nil rate band (RNRB)
New rules from April 2017 mean that an estate will be entitled to the RNRB if the:
- individual dies on or after 6 April 2017;
- individual owns a home, or a share of one, so that it’s included in their estate;
- individual’s direct descendants such as children or grandchildren inherit the home, or a share of it; and
- value of the estate isn’t more than £2 million.
An estate will also be entitled to the RNRB when an individual has downsized to a less valuable home or sold or given away their home after 7 July 2015.
The maximum available amount of the RNRB will increase yearly. For deaths in the following tax years it will be:
- £100,000 in 2017 to 2018
- £125,000 in 2018 to 2019
- £150,000 in 2019 to 2020
- £175,000 in 2020 to 2021
- Rising with inflation thereafter
Any unused RNRB when someone dies can be transferred to the deceased’s spouse or civil partner’s estate. This can also be done if the first of the couple died before 6 April 2017, even though the RNRB wasn’t available at that time.
For estates valued at more than £2 million, the RNRB (and any transferred RNRB) will be gradually withdrawn or tapered away.
Tax free gifts
You might want to make use of tax free gifts to transfer your assets to other people. The following are all tax free for the tax year 2017/18:
- Some gifts to charity
- Small gifts up to £250
- Gifts up to £3,000 per year
- The first £325,000 of your estate on death
- Gifts within the capital gains tax limit of £11,700
- Regular gifts made out of income (eg to a pension or insurance plan)
- Gifts to your spouse or civil partner (but a limit applies if they are domiciled abroad)
- Gifts to someone getting married (£5,000 for parents; £2,500 for grandparents; £1,000 otherwise)
Gifts above these levels can be made but may still be liable to IHT if you die within 7 years of making the gift. This is called a 'potentially exempt transfer'. Cost effective life insurance policies are available to mitigate any IHT liability that may arise after making a gift.
You cannot gift away cash or assets which you continue to benefit from without incurring a tax charge. An example of this is gifting your home to your children whist you still occupy it rent free. The same applies if you give cash to someone to buy an asset which you then benefit from.
Trusts can be an effective way of avoiding IHT. Assets placed in trust for the benefit of someone else are no longer part of your estate. However, the tax rules surrounding trusts have been changed in recent years and are no longer as favourable. You should talk to us for professional advice before placing assets in trust as this is a very complex area of taxation.
Financial advice and wills
We work with a firm of Independent Financial Advisers who together with ourselves can help you get your tax affairs in order to help mitigate future IHT liabilities.
You should also make sure you and your partner have up to date wills, especially if you're not married or have previous marriages. We can help you with any tax planning issues prior to writing an up to date will.
Business property relief
If you give away a business or a share in a business, or unquoted shares in a business, 100% relief is available provided that you or your spouse owned it for at least 2 years prior to the transfer. However, if you give away business land, buildings, plant or machinery, or a controlling shareholding in a quoted company, only 50% relief is available.
Relief is not available for pure investment companies, nor is it available for plant and machinery used partly for private use. However, you can claim relief for just part of land or buildings, provided that that part is used exclusively for business.
Agricultural property relief
Tax relief may be available if you give away agricultural land and property during your lifetime or on your death, provided that you or your spouse used it for agricultural purposes for at least 2 years prior to the transfer. If you did not use it yourself, you must have owned it for 7 years and it must have been tenanted for agricultural purposes throughout.
Further information about IHT can be found on the HMRC website:
This information is not meant as a substitute for professional advice and by no means covers every scenario. Almost every rule described here will be subject to many exceptions and caveats. Tax legislation is extremely complex and can be difficult to understand. You should discuss your circumstances with a qualified professional before acting on any information contained within this website. Tax legislation is constantly changing and the information contained within this website is written from our current understanding and interpretation of the tax system as of 6 April 2018.
Links to external sites - Brown Royd cannot be held responsible for the content of external sites.