Financial Services > Tax Planning > Inheritance Tax

 


The British government is entitled to a proportion of the assets built up by British citizens at the time of their death. This tax is payable upon assets anywhere in the world and there is often a similar tax payable locally upon assets held outside the UK.


..............................................................................................................

For most countries arrangements have been made to make certain that the highest rate of Inheritance Tax is the maximum amount collected to avoid the situation that used to apply where the tax was payable locally and also to the UK authorities.

Like all other UK taxes, the threshold at which the tax becomes payable, exemptions and the rate of tax changes with the Budget every year and so it is important to monitor the potential tax liability every year.

In the 2017/2018 tax year anything that you leave to your spouse, your registered civil partner, charity, medical research or recognised polital party escapes Inheritance Tax on death. For all other bequests there is a tax-free cap of £325,000 in all and almost everything else is taxed at 40%.
This particular tax is affecting a growing proportion of UK citizens despite the claims of MPs to the contrary.

With effect from 9th October 2007 the rules for this tax were modified for the better. Many people fail to use all of their tax-free allowance when they die, giving most if not all of their Estate to their spouse or registered civil partner. That unused allowance can now be carried forward for use when the surviving spouse or registered civil partner subsequently dies. To make it even better the unused allowance on the first death is expressed as a percentage of the allowance available. An example may help to make this clearer.

David died and gave £3,000 to each of his 3 children plus a further £9,000 between his 3 nieces and nephews before leaving everything else to Jane. The £18,000 given away by David represents 5.77% of the tax-free allowance and so when Jane dies she can give away 194.23% of the tax-free allowance at the time of her death. This means that less tax will be payable overall and the family should be protected against the effects of inflation if the tax-free allowance continues to be increased each year in line with inflation.      

Thankfully there are steps that can be taken to avoid or minimise the tax eventually payable. There is no single or universal solution to this problem, but it should not be ignored. Even if you are terminally ill and have made no plans to address this topic before, there is a relatively cheap answer. Doing nothing will see 40% tax collected on part of your Estate but this strategy will 'only' cost six-and-two-thirds percent. If you start to plan earlier, the costs are little or nothing, but even six-and-two-thirds percent is obviously much better than 40%.    

..............................................................................................................

As a first step for those who are neither married nor in a registered civil partnership it is vital that a Will has been written to take maximum advantage of the personal tax-free allowances through the use of a Discretionary Trust. This type of Will typically costs about £500.00 and can avoid up to £130,000 of Inheritance Tax.

For those who are married or in a registered civil partnership and who wish to make provision for surviving children or relatives under the age of 18, they should also make a Will and establish a Discretionary Trust to accompany it. This will ensure some protection beyond your death to prevent the young beneficiaries from gaining access to the capital without the approval of mature Trustees chosen by you. Access can be denied up to age 25 but not beyond that point. As each case is unique individual advice will be given if you ask Corrigans. 

..............................................................................................................

Some people find that they would like to give money away during their lifetime so that they can see their family or friends benefitting from their generosity. This presents potential problems as far as HMRC are concerned and so limits have been imposed upon that freedom: -

  • £5,000 can be given by each parent when a child marries or enters a registered civil partnership.
  • £2,500 can be given by each grandparent when a grandchild marries or enters a registered civil partnership.
  • £1,000 can be given to anyone marrying or entering a registered civil partnership.
  • £250 can be given each year to as many people as you want who are not receiving a larger gift from you.
  • £3,000 can be given away each year and if you did not use up all of that allowance in the previous tax year then you can add the unused allowance on to the limit for this year.
  • You can give away more than £3,000 each year if you have spare income - NOT SPARE CAPITAL - but it has to be done in more than one tax year to be regarded as a 'regular' gift out of income. It does not have to be the same amount every time or to the same beneficiary. 
  • £325,000 is the maximum amount you can give away in a 7 year period without triggering an immediate tax charge, but you can do the same thing again 1 day after that 7 year period has elapsed. If you die before the 7 years have passed then some or all of your gift will be added back into your taxable Estate. You get no discount if you die within 3 years of making the gift, 20% if you die in year 4, 40% in year 5, 60% in year 6 and 80% in the 7th year.   
..............................................................................................................

Beyond this, avoidance measures become more expensive but should at least be considered. After all, the government is quite happy for every UK citizen to organise their affairs to take advantage of the rules that the same government has laid down regarding any form of taxation - so there are clear benefits to be had from doing so.