As Benjamin Franklin once said; the only two certainties in life are death and taxes. Although it’s a sombre subject, it is important to put in place the right planning so that when we are hit by one, we can avoid the other. We want to ensure we are able to leave as much of our wealth as possible to the next generation, and in order to do this we may need to achieve Inheritance Tax relief in a variety of ways.
Each individual is currently entitled to a tax-free Nil Rate Band of £325,000 (refreshing every seven years) to be offset against gifts or the transfer of their Estate. There is also the availability of the Residence Nil Rate Band, currently £175,000, which is available if your residence is being left to a direct descendant as part of your Estate. If you were to pass away and your spouse survived you, the spousal exemption would mean that the whole of your Estate, regardless of value, could be transferred to your surviving spouse with no Inheritance Tax charge. In addition to this, the Nil Rate Band and the Residence Nil Rate Band are transferrable to the surviving spouse so that they can be utilised on top of their own bands.
However, it is usually on the death of the surviving spouse where we see Inheritance Tax liabilities arise. If the second spouse had received the transferrable bands mentioned above, they would have a total of £1million value in their Estate which would pass on tax-free. Any value over the £1million mark, though, would be subject to Inheritance Tax at 40%. This is where it is invaluable to consider ways in which we might pass on wealth from our Estates pre-death in a tax-efficient manner. We can advise on a number of Inheritance Tax reliefs and exemptions to make your Estate as tax-efficient as possible, such as:
Utilising the Nil Rate Band
The Nil Rate Band refreshes every seven years. This means that tax-free gifts of up to £325,000 could be made during your lifetime, providing you survive seven years after the date of the gift.
Inheritance Tax Annual Exemption
Each individual has an annual exemption of £3,000 per tax year – you can make gifts up to this amount without incurring an Inheritance Tax liability.
Small Gifts Exemption
Any gifts up to the value of £250 can be made to an individual each tax year. This exemption is £250 per individual, so you could make gifts of £250 each to every family member.
Gifts out of Surplus Income
An exemption is also available for gifts made from your income which is excess to your living requirements. These gifts have no maximum value, so this can be a very valuable relief. There are however some criteria which need to be met in order to claim the exemption:
- You must be able to prove that the gifts are made out of income which you do not need in order to maintain your current standard of living.
- The gift must be made out of your income reserves, and cannot be capital in nature.
- Gifts must be made in a ‘regular pattern’ – i.e. there cannot be one-off gifts which qualify for this exemption.
Gifts to Charity
Any gift to charity is exempt from Inheritance Tax. There is also favourable treatment of an Estate where a sufficient legacy is left to charity, by way of a reduced rate of Inheritance Tax.
It is possible to make a wedding gift of £1,000 to anyone, free from Inheritance Tax. The exempt amount rises to £2,500 for the wedding of a grandchild, or £5,000 for the wedding of your child.
As well as the above, there are a number of other reliefs and planning points which Whitings can advise on. We offer a comprehensive Inheritance Tax Review service where we tailor our reports to your individual goals and circumstances.