HMRC enjoyed a record-high intake of inheritance tax last year, amounting to £4.6 billion. This figure for 2015-16 represents a 21% increase from the previous year and a staggering 70% increase from 2010-11, which serves to highlight the importance of effective estate planning.
Inheritance tax (IHT) is payable if a person’s estate (including any property, money, investments and possessions) exceeds the “Nil Rate Band” (“NRB”) or IHT threshold, currently £325,000, when they die. If an individual owns assets worth more than the NRB at the date of their death, anything above that figure will be taxed at the rate of 40%.
With the threshold remaining at this figure since April 2009, a significant reason for these increased receipts taken by HMRC is that the threshold has not kept pace with inflation and rising property prices (often the core of a person’s estate), which are pushing more people than ever into the Inheritance Tax bracket. So, what can you do to ensure your estate does not become liable to Inheritance Tax?
With careful lifetime planning it is possible to mitigate the tax which might become due on your estate. While many think this is not something that they need to worry about until they are much older, the reality is that estate planning is an ongoing process that should be carried out to mitigate reasonable sums of tax from your estate over a period of time.
Where a couple are married or in a civil partnership, the Spousal Exemption allows for assets to pass free of tax from one spouse to the other, either during life or on death. Moreover, any NRB which is unused on the death of the first spouse can be transferred to the surviving spouse’s estate, meaning that the survivor’s estate can be worth up to £650,000 before any IHT is due.
Other estate planning options include making lifetime gifts, or placing money or property in trust. IHT reliefs are also available, including Agricultural Property Relief and Business Property Relief. In some circumstances it may be appropriate to invest sums in the Alternative Investment Market, whose shares may qualify for Business Property Relief so long as certain conditions are met.
The new main residence nil-rate band which is to be introduced from next April should similarly be considered, as this introduces an additional nil-rate band when a residence is passed on death to a direct descendant. This additional band will amount to £100,000 in 2017-18, increasing annually until 2020-21 when it will be £175,000. If certain conditions are met, this will result in an IHT threshold of £1 million being available for married couples from 2020-21.
These are just some of the choices that you have - there are many other ways in which you can substantially reduce the ultimate IHT liability on death. No two circumstances are the same, however, and it is important that appropriate advice is sought. Indeed, HMRC’s increased IHT takings should serve as a reminder to more people than ever to consider estate planning.
If you would like to obtain estate planning advice tailored to your specific needs and circumstances, our experienced team of solicitors are on hand to help.