It can be hard thinking about what will happen to your family and loved one when you are gone, but you can take some comfort in knowing that you are doing your best for them financially - by making sure that they inherit as much of your wealth and financial assets as possible. If your total combined assets are over the inheritance tax threshold (IHT), your family will have a bill to pay to HMRC shortly after your death - and no one wants to be thinking about that. However, with some careful planning and preparation for inheritance tax, you can keep that bill to a minimum.
We provide inheritance tax planning advice for investments and properties so that you can rest assured that your family is provided for and cared for after your death, without worrying about inheritance tax bills.
Inheritance tax is a tax on the property, possessions, and money, otherwise known as the estate, of someone who has died.
How much you pay depends on what your estate is worth. The following things are taken into account:
Everyone has an NRB - the Nil Rate Band. This means that the first £325,000 of your estate can be passed on without paying inheritance tax on it, so if it is worth less than this, you avoid paying any tax. However - if you make any significant financial gifts in the seven years leading up to your death or reserved a benefit, inheritance tax will be due on this, assuming it takes you over the NRB.
What do we mean by reserving a benefit? Well, it simply means when you give someone something in your name, such as a house, but you don’t let them use it (i.e., you carry out living in it yourself) until after your death.
If your assets take you into the inheritance tax threshold, you only pay the tax on the excess. So, if your assets are worth £450,000, you will pay tax on £125,000.
The NRB is not the only allowance; there is also the Residence Nil Rate Band (RBRB). This allowance comes into effect if your estate includes a property that is to be passed onto immediate dependents, such as your spouse, children, grandchildren, and civil partners. This gives you an additional £175 000 tax-free.
Assuming that you have a will, the person you named as executor will be in charge of making the payment to HRMC in the event of your death. If you do not have a will, the administrator of your will is responsible for it. It is paid for by using funds from the estate or from money raised by selling assets. Once the tax bill has been paid, the remaining assets are shared among those named in the will.
One of the main problems with inheritance tax is that it needs to be paid within six months of death. However, in many cases, especially complex ones, it can take a lot longer to sort out probate. To add to the problem, probate (where assets are released from the estate) is not granted until the inheritance tax has been paid, leaving beneficiaries and next of kin in a tricky position.
There are three ways of getting around this; firstly, the executor of the will can pay directly to HMRC from the estate if there is enough money to cover the bill. If not, a loan may be secured from the bank to pay it and be repaid in full when probate has cleared. Thirdly, if the assets are in the form of property, the HMRC may agree to payment over instalments.
While it is a legal requirement if assets exceed the NRB, no one wants to pay more than necessary, and luckily, there are some things that you can do to reduce the amount that has to be paid - and remain on the right side of the law. These include:
Gift to your partner: If you are married or in a civil partnership, your assets can be given straight to them, and no inheritance tax will need to be paid, assuming they are from the UK. If they were born outside of the UK, the rules are different, so you should call us for advice from an inheritance tax advisor.
Gift to family: This one can be a challenge because if you were to die within seven years of giving it, it would still be counted towards your assets. However, you can give away limited amounts while you are alive - up to £3000 a year, and you can gift to your children and grandchildren when they get married.
Put assets into trust: If you put property, money, or investments into trust - perhaps for a grandchild - they are no longer part of your estate and are therefore not counted when it comes to calculating inheritance tax.
If your main home is in Wales or England, your estate has to pay inheritance tax based on your assets owned across the globe. Overseas assets are only exempt if your main home or domicile is abroad as well.
If your estate includes business assets, it could qualify for business property relief (BPR). This means no inheritance tax is paid on any business properties, business interests, or shares in unlisted companies. It can also reduce IHT to 50% on some other business assets. If you work in the agricultural industry, there are exceptions there as well. It is a complex area, though, and you would benefit from specialist advice from an inheritance tax advisor.
While property transfers between married couples and those in a civil partnership don’t qualify for inheritance tax, unmarried couples do. It becomes problematic if you own a property or assets with someone and are not married. Again, it is essential to make sure that you seek advice from an inheritance tax advisor in this situation.
For more information about any of the information that we have provided here, give us a call and find out how we can help you.