Inheritance tax or “IHT” is still a “voluntary” tax if you plan for it carefully and far enough ahead. What is great about IHT is that you do not have to rely on dodgy artificial tax schemes to avoid it as there are a number of legitimate ways to avoid built into the tax. However, if you fail to plan for IHT you could find that your family are left with far less of your assets than you wanted. The IHT rules are complicated so it is best to seek advice from a professional tax specialist like Patrick Cannon to help you understand the position and take advantage of whatever legal ways there are to avoid IHT.
Of course, you may prefer 40% of your estate to end up with the Chancellor knowing he or she will spend it on catastrophic government IT and transport projects but if you would rather that wealth went to your heirs then read on.
What is Inheritance Tax Planning?
Inheritance tax is a tax on the value of a person’s worldwide estate (i.e., their property, money and possessions) when they die. In certain cases, it may also be charged on large lifetime gifts (see below). Persons with a non-UK domicile will usually only pay IHT on their UK assets unless they are deemed to have become domiciled in the UK.
Inheritance Tax Planning Rates Explained
The rate of IHT depends on the value of a person’s estate. The value is based on the assets (cash in hand and cash in the bank, investments, property or business, vehicles, payments from life insurance policies etc), less any debts and liabilities such as mortgages.
Normally IHT is not payable if either:
- The value of your estate is £325,000 or less; or
- You leave everything over £325,000 to your spouse, civil partner, a charity or a community amateur sports club.
If neither of these applies, your estate will be taxed at 40% on anything above the £325,000 threshold when you die (or 36% if you leave at least 10% of the net value to a charity in your will).
However, this £325,000 tax-free threshold might be higher depending on your circumstances – in some cases as high as £500,000, or even £1 million (see below).
Who pays Inheritance Tax?
IHT is normally paid by your executors or personal representatives after you die out of the assets in your estate before the remainder can pass to your family or heirs.
What are some of the main Inheritance Tax exemptions?
- the ‘nil-rate band’ of £325,000
- but if you’re leaving your home to your direct descendants, e.g., children or grandchildren the basic allowance of is £325,000 but to that, you add the ‘residence nil rate band’, which in 2020/21 was £175,000 so that no inheritance tax is charged on the first £500,000 of the estate (£325,000 + £175,000) but this £175,000 main residence allowance only applies though if the estate is worth £2 million or less and in excess of this you lose £1 for every £2 of value above £2 million
- assets left to a spouse or registered civil partner, provided they’re living in the UK, are exempt from inheritance tax
- plus the surviving spouse’s inheritance tax allowance rises by the percentage of the allowance that the deceased spouse didn’t use which means that together a couple can currently leave £1,000,000 tax-free
- farms, businesses and woodlands also attract IHT reliefs
How can Patrick Cannon advise me on Inheritance Tax Planning?
This is one area of tax where you get what you pay for and the old adage “buy cheap buy twice” rings true. If you have a large estate or are thinking of a large lifetime transfer, IHT planning advice from an experienced tax adviser like Patrick Cannon will potentially save your heirs a great deal of money. Capital gains tax advice, stamp duty land tax and if relevant VAT, advice can also be factored into the inheritance tax planning.
IHT is a complex tax but with a wide range of reliefs and exemptions that with careful planning and specialist tax advice render much of it voluntary.
How Patrick Can Help
IHT is a very complicated tax. If you are considering how to provide for your spouse and family when you die and wish to minimise the IHT or if you are from overseas and wish to protect your assets from inheritance tax or whether you can claim relief, contact Patrick Cannon to ensure you don’t miss out on any available planning or relief.
Frequently Asked Questions
People who receive gifts from you will be charged inheritance tax (on a sliding scale up to a maximum of 40%) if you give away more than £325,000 in the seven years before your death although they could take out life insurance on your life against the possibility of an inheritance tax bill.
Most gifts into a trust are now liable to inheritance tax even if made during the donor’s lifetime and IHT and trusts is definitely an area for specialist advice.
If you have an income such pension or earnings and you give money regularly from that source leaving enough income not to affect your lifestyle, then it is exempt from IHT.
If you own an agricultural property that has a working farm, then all or part may be exempt from inheritance tax. The same applies if you own woodland so that the timber on it, but not the land itself, may be exempt from IHT.
With careful planning using offshore trusts and companies, most non-UK domiciled individuals can protect their non-UK assets from UK inheritance tax, even after they have become deemed domiciled in the UK.
From 6th April 2017, an individual is deemed to be domiciled in the UK (even though they may continue to have a non-UK domicile under general law) if they have been UK resident for at least 15 out of the past 20 tax years.
If an individual is UK domiciled or deemed domiciled at the date of the transfer or death, then their worldwide assets are within the charge to inheritance tax, subject to any specific reliefs or exemptions. Also, the shares of an overseas company holding UK residential property are treated as UK assets for IHT purposes. At present, there is no charge to IHT on shares in overseas companies owning UK commercial property.
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For professional and insurance reasons Patrick is unable to offer any advice until he has been formally instructed.