Inheritance Tax in the UK and ways to reduce it!

Inheritance tax is a tax that is paid on the value of an estate when someone dies. In the UK, the current inheritance tax rate is 40% on anything above the ￡325,000 threshold. This means that if the value of your estate exceeds this threshold, any amount above it will be subject to a 40% tax.

In addition to the standard inheritance tax threshold, there is also a Residence Nil Rate Band (?#RNRB) of ￡175,000 which can be added to the standard threshold if you are passing on your main residence to a direct descendant. This means that for the tax year 2020/2021, the total threshold for inheritance tax is ￡500,000.

Inheritance tax is calculated based on the value of your estate, which includes all your assets such as ?#property, ?#cash, ?#investments, and ?#personal ?#possessions, minus any debts and liabilities. The tax is typically paid by the executors of the deceased's estate, but it can also be paid by the beneficiaries if the executors choose to do so.

It's important to note that inheritance tax is only payable on the portion of your estate above the threshold, so it's important to plan your estate carefully to ensure that you take full advantage of the available exemptions and reliefs. For example, there are exemptions and reliefs such as the spouse or civil partner exemption, agricultural property relief and business property relief that can help reduce your inheritance tax liability.

There are also ways to minimise your inheritance tax liability through gifting and trusts. Gifting assets during your lifetime can help to reduce the value of your estate and therefore the amount of inheritance tax that needs to be paid. Setting up trusts can also be an effective way to protect your assets and reduce your tax burden.

When it comes to paying inheritance tax, it is important to be aware of the deadlines for filing returns and paying the tax, as well as the penalties for late payment or non-compliance.

The Spouse or Civil Partner Exemption

Allows a person to pass on their entire ?#estate to their spouse or civil partner without incurring inheritance tax. This means that if the value of the estate is below the inheritance tax threshold, no tax will be due, and if the value of the estate exceeds the threshold, the tax will be based only on the amount above the threshold. This exemption applies to married couples and those in a registered civil partnership.

This exemption applies to all property, regardless of where it is located, and it is also possible to transfer any unused portion of the threshold to the surviving spouse or civil partner when the first partner dies, which effectively doubles the threshold for the surviving partner. This can be a powerful tool for reducing inheritance tax liability for ?#couples, especially for those with large estates.

Agricultural Property Relief (APR) and Business Property Relief (BPR)

Are two reliefs available under UK inheritance tax laws that can help to reduce the amount of inheritance tax that needs to be paid.

Agricultural Property Relief (?#APR) is a relief that can be claimed on agricultural property, such as farmland, agricultural buildings, and certain types of ?#agricultural machinery. To qualify for APR, the property must have been used for agricultural purposes for at least two years before the date of death. If the property qualifies, it will be eligible for a relief of either 50% or 100% of its value, depending on the circumstances.

Business Property Relief (?#BPR) is a relief that can be claimed on certain types of business assets, such as shares in unlisted trading companies, partnership interests, and business property. To qualify for BPR, the assets must have been used for the purposes of a qualifying trade for at least two years before the date of death. If the assets qualify, they will be eligible for a relief of either 50% or 100% of their value, depending on the circumstances.

Both APR and BPR are designed to support and encourage business and agricultural activities and can be a powerful tool for reducing inheritance tax liability for those with business or agricultural assets.

It's important to note that for APR and BPR to be applied, the assets have to have been held for at least two years before the date of death and the reliefs may not apply to certain types of assets, such as those used for residential purposes or those that are let on a commercial basis.

Gifting and Trusts

Are two strategies that can be used to minimise inheritance tax liability in the UK.

?#Gifting is the process of giving assets, such as cash or property, to someone during your lifetime. When you make a gift, you lose control over the asset, and you may also lose the ability to benefit from it. Gifting assets during your lifetime can help to reduce the value of your estate and therefore the amount of inheritance tax that needs to be paid. There are different types of gifts, such as small gifts, regular gifts, and gifts out of surplus income.

?#Trusts are legal arrangements in which assets are held by a trustee for the benefit of one or more beneficiaries. Trusts can be used to protect assets and to minimise inheritance tax liability. There are different types of trusts, such as discretionary trusts, interest in possession trusts, and life interest trusts. Each type of trust has its own rules and tax implications.

Both gifting and trusts can be complex strategies and it is important to seek professional advice before implementing them. It's also important to be aware of the seven years rule, which states that gifts made within seven years of death may be subject to inheritance tax.

By using gifting and trusts, it is possible to protect assets and reduce inheritance tax liability, but it is important to be aware that there are rules and regulations that must be followed and that professional advice should be sought to ensure that the strategies are implemented correctly.

Here is an example of how gifting and trusts can be used to reduce inheritance tax liability

Case Study: John and Mary

John and Mary are a married couple with two children. They own a family home, worth ￡500,000 and a business, worth ￡1,000,000. They also have savings and investments worth ￡500,000. Their combined estate is worth ￡2,000,000.

Without any planning, their estate would be subject to inheritance tax at 40% on the portion above the ￡500,000 threshold, which would result in an inheritance tax bill of ￡360,000.

However, John and Mary decide to implement a gifting strategy and set up trusts to reduce their inheritance tax liability. They begin gifting a portion of their assets to their children, starting seven years before John's expected date of death. They also transfer the family home into a trust.

As a result of these actions, the value of their estate is reduced to ￡1,200,000, which is below the inheritance tax threshold. This results in an inheritance tax savings of ￡360,000.

Additionally, By transferring the family home into a trust, John and Mary are able to ensure that their children will inherit the property without it being subject to inheritance tax.

Please share your thoughts in the comments and suggestions on any other strategies that can help families reduce a possible inheritance tax.