With inheritance tax payments hitting a record high at the end of 2017, the new year is a good time for you to ensure your wealth is in a position to be passed on to future generations, as tax efficiently as possible. According to HM Revenue & Customs, IHT receipts hit £5.3bn ($7.2bn, €6bn) in the year to November 2017, up from £4.7bn for the whole of 2016, as more estates than ever fall within its scope.
Failure to take advantage of the tax breaks available when transferring wealth from one generation to the next can see families being hit by the maximum IHT rate of 40%. This can come as a big blow – especially for individuals who are asset rich but cash poor. However, there are a number of easy steps individuals can take in 2018 to ensure they or their families do not pay IHT unnecessarily.
Below are 10 potential steps you could take to reduce the inheritance liability for your beneficiaries.
1. Take advantage of lifetime gifts and “potentially exempt transfers”
Consider gifting cash or assets during your lifetime to reduce or potentially exempt them from IHT. The liability on such gifts reduces by 20% each year if you survive by more than three years after making the gift, down to zero after seven years.
2. Make gifts to friends and family out of excess income
Individuals are allowed to make the following gifts, exempt from IHT, each year:
• £3,000 (one year’s unused allowance can be carried forward to the next, accruing a total allowance of £6,000)
• Wedding gifts worth up to £5,000 for a child; £2,500 for a grandchild; or up to £1,000 for anyone else, can also be made free of IHT.
• Multiple small gifts of up to £250 per person can be made each year, as long as they have not already benefitted from other gifts made.
• Gifts made out of excess income as part of a regular pattern of giving are exempt – with no limit to the amount which can be gifted.
3. Check your will is up-to-date
Write a will and review it will periodically to ensure that your current wishes are reflected; that changing family circumstances are taken into account; and that IHT is minimised.
4. Monitor whether your estate’s value is likely to exceed the nil rate band
Keeping an eye on the approximate value of your estate means you will be able to take timely action to reduce the amount of IHT beneficiaries could have to pay, using the steps outlined below. Estates worth £325,000 can be passed on free of IHT. For married couples and civil partners, this nil-rate band can now be transferred to a surviving spouse – effectively doubling the nil-rate band to £650,000. Plus, there’s an additional nil-rate band where individuals wish to pass on a property to direct descendants, worth an extra £100,000 free of tax in 2017/18, rising to £175,000 by 2020/21.
5. Consider setting up a trust
Individuals whose estates are likely to exceed the nil-rate band may want to consider setting up a trust to shelter assets from IHT. Effectively this means handing over assets to trustees to look after for the benefit of beneficiaries, so they no longer form part of your estate for IHT purposes. Investing through investment bonds can be a tax efficient way of mitigating tax when using trusts.
6. Identify assets to sell or give away free of CGT
Assets worth less than £6,000 can be sold or given away free of capital gains tax (CGT). This can be an easy and simple way of reducing the value of your estate.
7. Take out life insurance and ensure it is tax efficient
It is important to make sure that life insurance benefits are assigned into trust rather than being paid to the (taxable) estate of the insured.
8. Make a bequest to charity
Bequests to charity will be taken off the total value of your estate before IHT is calculated. If you leave more than 10% of the total value of your estate to charity, the IHT rate will be cut to 36%.
9. Make sure cash is accessible
Having an emergency pot of cash for families to fall back on after death is important. It can help in the short and medium term by, for example, enabling spouses or children to settle outstanding bills.
10. Investigate the possibilities of Business Property Relief
Business Property Relief (BPR) is available on the shares of family trading businesses. However, it is also available on unquoted shares generally – meaning that investments in many AIM or EIS (Enterprise Investment Scheme) shares may qualify for 100% relief.
Investments in AIM shares or EIS should only be made for sound investment reasons rather than for tax purposes. However, for those with the right experience and risk appetite, this could be a way to drive investment portfolio returns as well as reducing IHT.
The new year can be a good time to re-evaluate your position and identify any sensible tax planning steps that could be taken. A pro-active, forward-thinking approach is key. Identifying opportunities to trim your assets down is really important. A review also allows you to consider how much of your exemptions you have used up – and how much more you have to go before the end of the financial year in April.
Inheritance tax planning can be complex as it can often result in some competing targets for your assets – such as your potential need for care. You are likely to find it helpful to discuss your situation with an adviser that can guide you through this maze of choices ensuring your objectives are met. After all, many people would have a preference to pass on their wealth to their family or a charity rather than HMRC.