Since 1694, the UK government has had some form of taxation system at death. A previous Prime Minister (David Lloyd George) once proclaimed “the most convenient time to tax rich people is when they are dead”. Sadly with the rise of personal wealth and in particular house prices you no longer have to be “rich” to pay this tax.
Today, death taxation is referred to as inheritance tax and it brings additional planning opportunities into play. The easiest way to solve an inheritance tax problem is… spend it (or go SKI-ing – Spend the Kids Inheritance)! The problem is spending all your money may not be appropriate.
Essentially for a UK resident and domiciled person, inheritance tax is charged on your worldwide assets including property, money and possessions. Gifts made in the previous 7 years may also be included. The bigger the estate, the bigger the inheritance tax bill!
Firstly inter-spouse transfers are exempt. After that under current rules, every person has a “nil rate band”. Simply put, for the 2023/24 tax year this means the first £325,000 of an individual’s estate is taxed at 0% with the excess charged at 40%. However this is where the simplicity ends! In the case of a civil partnered or married couple, the surviving spouse may also inherit their nil rate band so assuming spouse 1 left everything to spouse 2, spouse 2 has an effective nil rate band of £650,000.
Where an estate leaves at least 10% to registered charities, the inheritance tax charge may be reduced from 40% to 36%.
There are some gift allowances excluded and up to date details can be found here: https://www.gov.uk/inheritance-tax/gifts
There are some further relief’s available for business’s and farms, up to date details can be found here: https://www.gov.uk/business-relief-inheritance-tax
How To Avoid The Dreaded Inheritance Tax!
Planning ahead at least 7 years is crucial, some of our recommended options to best avoid IHT are:
Gifting/Disposing of Assets
Gifting is very much a part of inheritance tax planning but some clients don’t realise there are actually strict rules on the value, amounts and timing that gifts can be made. Doesn’t really seem fair as its your money but you can read the rules here: https://www.gov.uk/inheritance-tax/gifts
A gift can be described as anything that has a material value. Under normal rules any gifts made will remain in your estate and effectively use up your nil rate band for a possible 7 years unless it is an “exempted gift”. An exempted gift is described by the government in the above attached link.
A will cannot help you avoid inheritance tax in itself, however a will is vital to ensure your money goes to whom you would want it to. Where you require complete control and access to all your money in your lifetime, a will could establish something called a “will trust” providing some control and possible inheritance tax avoidance.
By using trusts you are basically giving your money away and using correct trusts can provide some continued control of the money and starting the 7 year clock to get the money outside of your estate. There are certain types of investments that are particularly suitable to be used!
You can learn more about trusts here – https://financialfortress.co.uk/what-we-offer/general-info/trusts/
Use life insurance
You could just accept that the tax needs to be paid and opt to take out a “whole of life” insurance policy. This would provide your family with a cash lump sum that could be used to pay any tax due – essentially meaning they then inherit your property and assets with no reductions!
There are investments that can provide immediate discounts to your inheritance tax bill straight away regardless of how long you live. Others can take up to 7 years to work however and therefore early planning and expert advice is vital.
The Main residence nil rate band:
Again in the tax year 2023/24, every person may also receive an additional nil rate band of £175,000 which may be used to offset the value of their home. However, they can only receive this additional allowance where the home is left to either children or grand-children of the deceased. Again this additional allowance can be transferred to any surviving spouse if unused meaning there may be up to £1million in an estate before inheritance tax is due.
At Financial Fortress, we are experts in inheritance tax planning and have the experience to mitigate it effectively. Remember tax avoidance is perfectly legal, it is tax evasion that is not. Your adviser will ask questions to understand your circumstances before forming a plan and making accurate recommendations. Inheritance tax is probably one of the easiest taxes to avoid as long as you begin at least 7 years before death. We may recommend a series of gifts or perhaps a more complex trust arrangement to maximise the value of your estate for loved ones. It is likely we will need to work with a solicitor to make the plans work, are happy to work with your own or recommend a partner firm if required.
The rules and regulation of these options can be complicated, so we highly recommend you get trusted expert advice! At Financial Fortress, we are experts in inheritance tax planning and have the experience to mitigate it effectively. Remember tax avoidance is perfectly legal, it is tax evasion that is not. Your adviser will ask questions to understand your circumstances before forming a plan and making accurate recommendations. It is likely we will need to work with a solicitor to make the plans work and are happy to work with your own or recommend a partner firm if required.
Get the advice you need from your local independent Chester based inheritance tax planning advisers. Start planning now, avoid IHT and maximise the value of your estate for your loved ones