The basics of how Inheritance Tax is calculated
At the time of writing, the basic calculation of inheritance tax is as follows:
• Your estate will owe 40% on anything over and above the £325,000 Inheritance Tax threshold when you die.
• If you leave 10% of your estate to charity, the Inheritance tax owed is reduced to 36%.
• A married couple can pool their tax-free band together if they leave their estate to one another. So, if one spouse passes on their estate of £650,000 to the other, upon the latter’s death, there is no IHT to pay.
Reducing IHT can also be achieved by taking advantage of the Main Residence Nil-Rate Band.
The Main Residence Nil-Rate Tax Band
In April 2017, the Main Residence Nil-Rate Band came into force. From 6th April 2017, provided you pass your family home onto your direct descendants, the first £100,000 of the property’s value will be tax-free. This threshold will rise by £25,000 every year to £175,000 by 2020/21.
To qualify for the Main Residence Nil-Rate Tax Band, the following conditions must be met:
• You must have lived in the property at some point. Buy-to-lets are unable to attract the Main Residence Nil-Rate Tax Band. If you own multiple properties, the tax relief can only be applied to one of them.
• The property must be left to your ‘direct descendants’ which can include children, grandchildren, step-children, adopted children, foster children, and the spouses of these people.
• If your estate is worth more than £2 million, the Main Residence Nil-Rate Tax Band is reduced by £1 for every £2 that the estate is valued over £2 million.
By taking full advantage of the IHT and main residence tax free band, you will reduce the IHT owed on your estate.
But what if this is not enough?
Other ways to reduce inheritance tax
Your Solicitor can help you create a strategy to reduce your overall IHT bill. One of the simplest ways to plan effectively for IHT reduction involves gifting.
A gift is defined by HMRC as anything with value. Gifts can consist of money, possessions, or property. For example, if you give your daughter a valuable ring, this may be considered a gift for tax purposes. A gift can also be made by selling something below market value, for example, transferring your holiday home to your children for well below the normal asking price.
The following are a series of gifts you can make each year that will not attract IHT upon death.
• Gifts of up to £250 (either cash or possessions) per person.
• Gifts which come from your income as opposed to savings – for example, buying a pram for your child who is about to become a parent.
• Wedding (or civil ceremony) gifts valued at £1,000 per person, £2,500 per grandchild, and £5,000 per child.
• Charitable donations.
For larger gifts, the seven-year rule applies. If you give a gift, regardless of its size and value, and survive for seven years after the exchange, it will not be subject to IHT. If you survive over three years, the rate of IHT is reduced.
You can also place property and assets into a trust to avoid paying IHT. This is a complex process and requires expert legal advice. Be aware that if the property you transfer into trust exceeds your IHT nil-rate band, you will have to pay a charge on every ten-year anniversary after the date the trust was established.
IHT planning is an essential component of ensuring your affairs are in order, alongside creating a valid Will and a Lasting Power of Attorney. An experienced private client Solicitor will provide the advice and support you need to ensure you and your loved one’s best interests are protected.
Guillaumes LLP Solicitors is a full-service law firm based in Weybridge, Surrey. We have a highly experienced private client law team who can assist you with IHT matters. To make an appointment, please call us on 01932 840 111.