Inheritance Tax and Estate Planning

Planning to minimise the liability to Inheritance Tax is a team effort involving you and your professional adviser.

When should I plan for Inheritance Tax (IHT)?

IHT is currently payable where a person’s wealth is more than £325,000 (2017-18). Thus, if you own your house and have some savings, life assurance policies, or business assets, your estate could be liable.

From 6th April 2017, a nil rate band of £100,000 will be available when a main residence is passed onto a direct descendant after a death. If the net value of the estate exceeds £2 million, this additional nil rate band will be reduced by £1 for each £2 over the threshold.

A surviving spouse or civil partner may claim the unused proportion of an earlier deceased spouse’s nil rate band and additional nil rate band for an additional claim, up to the current nil rate band/additional nil rate band threshold.

How does IHT work?

When you die, IHT will be charged on your personal wealth, together with all of your lifetime gifts or a proportion of them made in the preceding seven years.

The full rate of tax is 40%, but this is reduced on a sliding scale for gifts made between three and seven years before your death.

What do I need to consider?

You must think about the following:

  • The value of your assets now and in the future
  • Your own financial security
  • Your family’s future needs

What can I do to reduce the IHT bill?

  • Transfers of assets between spouses and civil partners are exempt from IHT, but other lifetime gifts may be more tax-efficient.
  • Lifetime gifts are potentially exempt from IHT, and there is no limit on such transfers, so this is an excellent way of transferring assets that you do not need to keep in your estate. It may be advisable to cover substantial gifts by insurance against death within seven years.
  • Trusts let you transfer assets out of your estate for IHT purposes but enable trustees to exercise some degree of control over the capital or income (and you can be a trustee). There may be an IHT charge, but this would be at 20%, and then only if the transfer is over £325,000 (2017-18).
  • Life assurance policies (unless designed to cover IHT liabilities) should be assigned during your lifetime so that the proceeds do not form part of your estate on death. The most common assignees are spouses, family members, and trusts.
  • A reduced rate of 36% applies to death estates where 10% or more of the net estate is left to charity.

The above has emphasised the need for ongoing advice to ensure that your plans are relevant to your current situation and still in line with the existing legislation. We can help you and your family determine the best course of action to resolve any potential liability you may have, and ensure that as much of your estate passes on to your beneficiaries and as little as possible goes to Her Majesty’s Revenue and Customs in the form of tax.

Appointments for our Devon financial services can be held in our offices at Exeter or Exmouth during office hours. However, if it is more convenient, we can arrange for the appointment to be at your home address or business premises.

Thompson Jenner Financial Services Ltd is authorised and regulated by the Financial Conduct Authority.

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