There are two guarantees in life, death and taxes. Unless you plan your IHT correctly, you could end up paying considerably more than you expected in Tax, rather than leaving it to your family.
As its currently stands in the UK, upon death, Inheritance Tax is due on your estate (property, money and possessions) at the rate of 40%, unless one of the two following conditions is met;
- The value of your estate is below the £325,000 threshold
- You leave everything above the £325,000 threshold to your spouse, civil partner, a charity or a community amateur sports club
While there are a few exceptions to the rule, currently the Inheritance Tax rate is 40% which is charged on the part of your estate over the £325,000 threshold. As an example, if your total estate (Money, Property and Possessions) is worth £600,000, your inheritance tax will be charged at £110,000 ( £600,000 – £325,000 = £275,000. £275,000 taxed at 40% is £110,000)
Sadly politics play a major part in inheritance tax laws and a result are constantly changing depending upon what party is in charge. For example, with the current conservative government, a new rule called the “Main Residence Allowance” which for the 2019/20 tax year, allowed an additional £150,000 on top of the current threshold. As a consequence, the £325,000 allowances, would now become, £475,000 (or £950,000 for a married couple).
If the labour party came into power, they have stated they would reduce the allowance from the current £475,000 down to £125,000 (or £250,000 for a married couple).
Inheritance Tax (IHT) Questions and Answers
Would it be possible to gift my home to my children while I’m still living in it?
Yes, this is possible, however, you need to be very careful you’re following the correct set of rules. Family homes are typically where HMRC gets most of its Tax from and therefore dislike any inheritance tax schemes that try to avoid Tax on the family home.
Consequently, I would not guarantee success, but it’s technically possible. You would need to set up a formal commercial leasing agreement and pay rent to your children on a monthly basis.
You’d also need to remember, you would not own the property, and therefore your children would be free to sell the property if they choose. This type of gift would also fall under the seven-year rule, meaning for the gift to be Tax-free, you’d need to live for at least seven years following the gift.
Should I Be Taking A Note Of Each Gift I Make?
It’s very important that you take an accurate record of each gift you make. Your record needs to include both the amount, the date of your gift and who you made the gift to.
It’s important that you do this to stop any problems with HMRC if they ever decided to investigate. Sadly, HMRC takes the view that you’re guilty of tax fraud until you’re proven innocent.
If you have kept a record of every gift you have made, it becomes much easier for your estate executors to prove what has been done and what gifts you have a made.
How Early Should I Start Inheritance Tax Planning?
This really depends on the size of your estate. With current inheritance limits being £325,000 for a single person and £650,000 for a married couple before any main residence allowance is taken into consideration, you may find that you don’t need to really plan for your death, as there will be little or no inheritance tax.
That said, if your estate is over the allowances, it’s a great idea to speak with your financial adviser to make sure you’re on the right track. Whether you’re still working or have started in you’re retirement, it’s a great idea to make sure your getting as much money out of your estate into plans like junior ISA’s for your children so that in the worse case scenario, if you pass away, this will not be subject to inheritance tax.
How Often Should I Review My Tax Inheritance Plans?
The biggest problem with any tax inheritance plan is the rules in place, and the fact they keep changing. As they change, what in the past was acceptable, possibly might not be now.
Personally, I would recommend that you review your tax inheritance plan each year, and sit down to discuss your strategies with a financial adviser, at least every two years. Every year you need to make sure you have reviewed your gifting strategy and have taken advantage of every aspect of your yearly allowance.
Can I Gift My Money To My Children?
Yes, you can. You can easily gift all or part, or all your taxable inheritance liability to your children, however, you need to aware that these gifts will fall under the seven-year rule.
Under this rule, you can make ‘Potentially Exempt Transfers’ (gifts) to your children and family for which they will not have to pay IHT as long as you live for a period of seven years from the date of the gift.
If you were to pass away within the seven-year period, the gift would become known as a Chargeable Transfer. Any gift outside of the NRB made within three years, or less of your death will be subject to 40% IHT with this percentage diminishing to 0% in line with the number of years since the gift was made, this is known as “Taper Relief“.
Is It Possible To Alter a Will After Death to Avoid Inheritance Tax?
Yes, it’s possible by creating a “deed of variation” where the beneficiaries agree to distribute assets in an inheritance tax-efficient manner. Any changes would need to be made within two years of death.
How Does The “Main Residence” Band Work?
The main-residence allowance has been designed to help offset the Tax due to the recent increase in property prices across the UK. Currently, for the tax year 2019/20, the main residence allowance is £150,000, on top of what you’ll get for your existing allowance, meaning a total individual allowance of £475,000.
For singles, this is made up of the existing £325,000, plus the extra £150,000. For couples, when the first person dies, their allowance is passed to the survivor, so that £475,000 is doubled to £950,000.
It’s been gradually increased over the last few years and will rise again by £25,000 in 2020/21 when it reaches £175,000 (meaning a total allowance of £500,000 or a £1,000,000 per married couple).
There is however a clause; If your estate is worth between £1 million and £2 million, inheritance tax will be paid as normal. However, if your estate is worth more than £2 million, you will lose £1 of the main residence allowance or every £2, above this £2 million limit.
I’m A Non-Resident British Expat – Am I Liable to UK Inheritance Tax?
This really depends on your “Domicile Status” and where your main residence is located. If you’re living outside the UK, but are deemed to be of a UK domicile status, you’re still liable for inheritance tax, subject the single or married person allowances as described above.
To not pay UK tax, you need to be a non-resident and not be domiciled in the UK.
Does the Married Inheritance Tax Allowance Take into Account the Time of Death?
You need to speak with a qualified financial adviser before you start to make concrete plans. Sadly the rules are very ambiguous and constantly change.
At the time of writing, the amount of allowance that can be passed between married couples is based on the size of the estate and how much of the allowance is used at the time of death.
As an example, ten years ago, the per person inheritance tax allowance was £200,000. Let’s imagine a scenario where your spouse died, leaving £100,000. This money passed directly to you without being subject to inheritance tax due to the married couple allowance.
Upon your death, you not only have a £325,000 personal allowance, but you also have a £150,000 main residence allowance giving you a total of £475,000. In addition, because you only used half of your spouses’ allowance when they died ten years ago, you can now add this 50% to you allowance meaning that you have an inheritance tax allowance of £712,500 (475,000 + (475,000/2)).
Do You Have to Pay Inheritance Tax before Probate is Granted?
Any inheritance tax that is outstanding will need to be paid before probate can be granted. This is because the Court will not issue a Grant of Probate (where there is a valid Will) or Letters of Administration (where there is no Will) until they receive a stamped receipt from HM Revenue & Customs confirming that the Inheritance Tax has been paid. This receipt is sent as part of the full Inheritance Tax return and is known as a form IHT421.
If you’re finding it difficult to pay the inheritance tax, it could be possible to pay it in installments over ten years if subject to Tax from land, business interests or possibly apply for an Executor’s Loan
What Are The Rules of Intestacy?
When a person dies without leaving a valid will, their property (the estate) must be shared out according to certain rules called the rules of intestacy. These rules also prioritise the order in which the assets are divided.
Typically it starts with a spouse or civil partner, before moving onto children/grandchildren, parents, brothers and sisters and then grandparents. This set of rules also clarifies who cannot inherit and more importantly what happens if there is no-one to inherit your assets.
Unmarried partners (sometimes wrongly called ‘common-law’ partners), lesbian or gay partners not in a civil partnership, close friends and carers cannot inherit your assets. If there is no-one to inherit your assets, your estate passes to the crown.
Any other questions you need answering on UK inheritance tax?