The amount of revenue that the government raises from inheritance tax (IHT) continues to rise year by year. In 2016-17, the figure rose again to over £4.9bn1, with experts expecting it to be even higher in this financial year.
Controversially, the threshold at which IHT applies has been stuck at £325,000 since 2009. Over the same time, house prices have mainly continued to rise, meaning that more families than ever have found themselves drawn into the IHT net.
Help has come in the form of the family home allowance that reduces the amount of IHT payable on a main residence being left to defined direct descendants. Referred to as the 'main residence nil rate band', it is being introduced in stages over four years, with a limit of £100,000 applying from April 2017, rising each tax year until it reaches £175,000 per person in 2020. This is in addition to the individual allowance for IHT of £325,000.
WHY PLANNING MATTERS
There are several ways in which you can reduce your potential liability to IHT. Many families consider giving assets away during their lifetime. However, you must outlive the gift by seven years, if not they count as part of your estate, although taper relief sometimes applies which can reduce the tax on larger gifts after a few years.
USING YOUR ANNUAL ALLOWANCES
Each financial year you can make gifts of up to £3,000 (in total, not per recipient) and if you don't use this in one tax year, you can carry it over to the next year but not beyond, which means you could give away £6,000.
Gifts of £250 per recipient per tax year to any number of people are exempt. Each parent of a bride or groom can give up to £5,000; grandparents or other relatives can give up to £2,500 and any well-wisher can give £1,000. Gifts to registered charities and political parties are also exempt.
WHAT IF GIFTING ISN'T APPROPRIATE FOR ME?
For many individuals and families direct gifts might not be appropriate for a number of reasons. Perhaps you are concerned that you might need the money yourselves later in retirement or you may worry about the consequences if your children should divorce or pre-decease you. There are a number of ways to address these concerns such as using a simple trust to hold the investments or where clients have concerns that they might not live the 7 years required for a gift to fall outside of their estate we sometimes consider investments which qualify for inheritance tax relief after just 2 years.
Every family's circumstances are different, so taking bespoke professional advice is essential in planning your estate. Contact Owen Thomas, Chartered Financial Planner, on 01904716000 or at firstname.lastname@example.org to arrange a free initial meeting.
Not all Inheritance Tax Planning solutions are authorised and regulated by the Financial Conduct Authority.
1 HMRC, Jul 2017