How to minimise your inheritance tax liability
With the ever changing economic situation as a result of the global pandemic, now is a good time for people to review their affairs to ensure that they are structured as tax efficiently as possible, so that they minimise the amount of inheritance tax they pay.
The main tax that people think about on death is inheritance tax. There are many exemptions and reliefs that can be used in your lifetime or on death to assist with mitigating inheritance tax. Some of these are more widely known than others and some are so little known that often they can be missed.
Financial gifts to friends and family
You can give away a total of £3,000 in any one tax year and this is exempt from inheritance tax whether or not you survive 7 years. Did you know that if you did not use your exemption in 2019/20 then you could also use it in this tax year 2020/21?
That is the annual exemption but there is also the small gifts exemption. The small gifts exemption cannot be combined with any other exemption but, under the small gifts exemption you can give up to £250 to each of any number of people in one tax year without any liability to inheritance tax. So, if you are someone who has 16 grandchildren you could give £250 to each of them each year therefore giving away £4,000 tax free every year, providing you give nothing else to each of the grandchildren in that tax year.
You can also give away as much as you want to individuals in any one tax year and, providing you survive 7 years, that gift will be exempt from inheritance tax as long as you cease to receive any benefit from it. Being able to give away as much as you want can be a valuable tool if you start planning early and it is worth noting that the government have talked about introducing gift tax so, earlier planning seems better as one would hope that any gift tax introduced would not be retrospective, though one can never be certain.
With gifting, you do have to bear in mind that if you do not survive 7 years then that gift gets included with the value of your estate on death and uses the first part of your inheritance tax allowance. If the gifts in the 7 years prior to your death are over the inheritance tax allowance then, unless your Will states otherwise, the people who have received the gifts are liable for the tax. To me this does not seem very fair as if someone gave me £50,000, I would effectively have to keep back £20,000 until the person who gave it to me had survived 7 years to ensure I had enough money to cover the tax. I imagine that most people do not make gifts thinking that the recipients might have to pay tax at a later date and therefore cannot enjoy the full benefit of the gift straight away. It is therefore important that if you are making gifts you ensure that your Will is up to date and states clearly who should pay the tax on any lifetime gifts that become taxable.
Gifts out of excess income
Another often missed exemption on death is gifts out of excess income. A lot of evidence has to be provided for this exemption to be used but essentially if you have excess income after tax each year and you show a regular pattern of gifting you may be able to claim that these gifts are exempt from inheritance tax whether or not you survive 7 years. These are only some of the exemptions and there are other exemptions such as gifts for maintenance of dependant family members. Here at Trethowans we can review your situation to ensure that you are making the most of your allowances and that your Wills are structured in such a way that the allocation of your allowances on death is fair.
Reviewing your Will
We can also review your Will to make sure that it is as tax efficient as possible and ensure that you are maximising any reliefs and exemptions. Many people have heard of business property relief and agricultural property relief which apply to some businesses and farm lands. However, often these exemptions are wasted. For example one spouse might own a business and they leave everything to their spouse on their death who then will leave everything to the children. This might seem logical but if the business is sold between the death of the first spouse and the second spouse then the business property relief would have been wasted. Instead technical drafting can use trusts to allow your spouse to benefit from the money when the business is sold but so that the money can eventually pass to your children without being taxed in your spouse’s estate. The same can be said for agricultural property relief.
Should I leave everything to my spouse?
Additionally, leaving everything to your spouse is not always the most tax efficient. If both spouses are domiciled here then, everything can pass from one spouse to another tax free. However the introduction of the residence nil rate band by the government a few years ago meant that in some cases this can be undesirable. This is because it could result in the second spouse’s estate being worth more than 2 million and thus the estate losing some or all of the residence nil rate band allowance. Again, use of trusts can sometimes mean that the spouse can have access to all of the assets when someone dies but that the spouse’s estate might be able to be kept under 2 million therefore allowing the residence nil rate band allowance to be claimed.
Income tax and capital gains tax
Although inheritance tax is the one most commonly thought of on death, income tax and capital gains tax can be more of a bugbear for people during their lifetime. There are ways in which careful planning can ameliorate some of that tax. For example, what if you and your spouse owned a property together. One of you works and the other doesn’t. If you own a property together, HMRC will assume that half of the income is taxed on each of you but a transfer of beneficial ownership that does not even need to be registered against the property at the Land Registry can sometimes mean that all of the income could be taxed on the non-earning spouse. Similarly when properties are sold transferring beneficial interests prior to sale can sometimes mean that you can use not only your own capital gains tax allowance but also that of your spouse.
As you can probably see, there are many ways in which, provided matters are dealt with carefully and correctly, taxes can be reduced.
It is important to take advice on doing this and to ensure that by gifting you do not give away more than you can afford to as whilst reducing tax is important it is also important to make sure you can enjoy what you have worked for.
Here at Trethowans we can provide you with an overall review of your affairs to see if we can reduce your tax liability and can also make sure that your Wills are structured as tax efficiently as possible.
For more information please contact our Wills team on 0800 2800 421 or get in touch here.