Caught Off Guard with IHT?

When someone dies and leaves an estate that is over a specific value, the estate is liable for Inheritance Tax (IHT). This is a tax on the value of the estate being passed on to beneficiaries, which must be paid to the relevant authorities depending on the deceased’s country of residence and where the assets are located. In the UK, it is HM Revenue & Customs (IHT); IHT is also due in some European countries and in the USA, it is known as Federal Estate Tax.

However, there are measures that can be taken to reduce your estate’s inheritance tax bill prior to your death, ensuring your beneficiaries actually receive the majority of their inheritance rather than lose most of it in taxes.

What is inheritance tax?

IHT is paid on a deceased’s estate, which includes property, money and possessions. In the UK, if the estate is valued at less than ￡325,000 – the nil rate band threshold – no IHT is due; if above that threshold, IHT is charged at 40% on the amount above the threshold limit. There are some circumstances where the amount of IHT is significantly reduced, or the deceased’s threshold is added to a living spouse.?

In the UK, inheritance tax is due on the global estate of a deceased person who was domiciled in the UK, including gifts made up to seven years prior to their death. That doesn’t mean to say that the person lived in the UK most of the time; they may not have done so, i.e. expats, but their principal address is UK-based and that is why their assets worldwide are included, unlike IHT rules in France.?

There are certain exemptions that can apply, as well as other actions you can take, that will reduce the IHT burden on your estate upon your death.

IHT exemptions and allowances

Nil rate band (NRB) allowance - currently in the UK, inheritance tax is due at a rate of 40% on the value of all assets over the nil rate band threshold of ￡325,000 per person. However, because assets bequeathed to surviving spouses/civil partners are exempt, it is possible to pass over any unused part of the threshold allowance to them as well, tax free. If you have planned your estate so that this happens on your death, and structured your will for those assets to pass directly on to your children and/or other heirs on the death of your surviving spouse/civil partner, it is possible for your beneficiaries to receive a combined threshold allowance of ￡650,000.

Residential nil rate band (RNRB) - the same principle applies to HMRC’s residential nil rate band (RNRB) allowance, currently ￡175,000 per person. This allowance can also pass to your surviving spouse/civil partner, and then directly onto your children and grandchildren (no other heirs), providing a combined allowance of ￡350,000. However, this allowance is only applicable if your main residential home is bequeathed to your children/grandchildren.

Giving gifts – you are entitled to give gifts from your estate to someone prior to your death and if this is done seven years prior to your death, inheritance tax is reduced to 36% on the value of that gift. HMRC consider the following as gifts:

• Household and personal goods, such as jewellery, art, furniture or antiques.
• Property, including land and/or buildings.
• Stocks and shares that are listed on the London Stock Exchange.
• Unlisted shares, as long as they have been held for 2 years or less before death.
• Money, including any money you lose when you sell an asset below market value. It’s the difference between the sale price and the market value that is considered a gift.

Some gifts can be made and will be free of IHT, such as:

• Annual gift exemption – you are entitled to gift up to the value of ￡3,000 in gifts every tax year which is not added to the total value of your estate, without paying any IHT. This can be gifted to one person or split between several people. In addition, you can carry over any unused annual gift exemption to the following year, but only once.
• Small gift allowance – the above principle applies but the gift is limited to the value of ￡250 per person, and you have not used any other allowance for that person. For example, you can use the small gift allowance for birthdays or other small occasions.
• Wedding/civil partnership gifts – again, the same principle applies but the value of the gift can be:
• Up to ￡5,000 to a child.
• Up to ￡2,500 to a grandchild or great-grandchild.
• Up to ￡1,000 for anyone else.

However, there is only no tax due on these gifts if seven years have passed before your death, which is known as the seven year rule. If this is not the case, taper relief applies as follows:

• 3 years before death – taxed at 40%.
• 3 to 4 years before death – taxed at 32%.
• 4 to 5 years before death – taxed at 24%.
• 5 to 6 years before death – taxed at 16%.
• 6 to 7 years before death – taxed at 8%.
• 7 years or more – taxed at 0%.

Leaving assets to a charity – you are entitled to leave money to a charity, or charities, in your will which reduces the value of your estate and therefore the amount of IHT payable. In some cases, deducting the charitable gift may result in the total value of your estate being below the nil rate band threshold and thereby be exempt from inheritance tax duty.?

In addition, if you leave more than 10% of your net estate, i.e. the value of your estate minus your nil rate band allowance, to a charity, the level of IHT due on the remaining amount is reduced to 36%.

Trusts, pensions and life insurance – any assets that are held by a trust for a beneficiary are not considered part of your estate upon your death. The same applies for any pensions or life insurance policies that you have written ‘in trust’. The trust is passed directly on to the beneficiaries exempt from inheritance tax. However, the beneficiaries still have to abide by the trust’s rules; these are set by you before your death and the trust is managed by your appointed trustees. For example, a beneficiary may not have access to the trust until they reach 21 years of age.

If you believe the value of your estate upon your death is in excess of inheritance tax nil rate band thresholds or you have assets worldwide but are domiciled in the UK, it’s important you consider your options alongside your potential tax liabilities.

International Wealth Solution Ltd (IWSL) are professional experts in providing high-net-worth wealth solutions. Whether you are looking to leave gifts to your family or a charity before your death, want to establish a trust, or need a bespoke solution for your specific needs, our team is here to help you with sound advice and comprehensive solutions. Contact us at?[email protected]?to see how we can help you.