“Tis impossible to be sure of anything but death and taxes” said Christopher Bullock, the Cobbler of Preston, in 1716. Inheritance tax (IHT) rather unfortunately combines the two problems. So what are the basic mechanics and reliefs?
Nuts and bolts
Inheritance tax is levied at a flat 40% on your total “death estate” – that is all of the assets (such as property and investments) minus outstanding liabilities, such as debt, that you leave behind on death.
Usually you have six months from the date of death as the executor of the deceased (the person appointed to deal with the death estate and matters of probate) to settle the bill, although this can be extended in certain circumstances where, for example, property needs to be sold.
Levied at a flat rate of 40%, this is quite a brutal tax so it is worth being aware of the key exemptions. What follows is just a short summary – your Investment Manager or Wealth Planner will be able to take you through these and others in more detail.
Key standard exemptions
In 2016/17, the first £325,000 of your death estate is free of inheritance tax. So, with a bit of straightforward planning, a married couple or civil partnership can exempt £650,000 because each person can transfer assets and any unused tax-free band to their spouse or civil partner on death. Beyond that the following are worth noting as a way of reducing a death estate before, or on, death;
- Gifts of any size and in any form, made more than seven years prior to death may escape IHT under the “potentially exempt transfer” (PET) rule
- Regular gifts made out of income escape too subject to certain tests regarding affordability
Other tax-free gifts include;
- Annual gifts of up to £3,000, individual gifts of up to £250 to any number of different persons and marriage gifts, subject to certain limits
- Gifts to political parties and charities
Business property relief
Entrepreneurs, or anyone who invests in unlisted companies, should also be aware of Business Property Relief (BPR), which applies at a rate of up to 100% on qualifying businesses, interests in such businesses or shares in unlisted companies provided the deceased owned the assets in question for at least 2 years prior to death. Once again there are conditions attached to this relief so do ask for further advice if you think this may be relevant. The overall effect is to remove assets to which the relief applies from a deceased person’s death estate.
Residence Nil Rate Band
One piece of forthcoming good news worth noting is that from 6th April 2017 a new IHT exemption will be introduced known as the Residence Nil Rate Band which will increase the basic exempt amount of £325,000. Here is a short summary of the key points;
Available if death occurs on or after 6th April 2017
Applicable only to a home (as nominated) or a share thereof
Total estate must not exceed £2m to fully qualify for the new relief
Property must be inherited by a direct descendant, or descendants e.g. a child/children or grandchild/grandchildren
The impact is to increase the exempt amount of a death estate by £100,000 in 2017/18 and thereafter in annual increments of a further £25,000 up to £175,000 by 2020/21 (at which point the total individual exemption will be £500,000, including a main home).
Other ways to reduce the IHT burden
This quick tour has not covered all of the ways in which you can reduce a death estate for IHT purposes. Other structures, such as trusts, also offer ways to reduce a family’s IHT bill. To discuss these and/or any of the points raised above in more detail please contact your Investment Manager or Wealth Planner.