With thousands of us separated from families and locked down in self-isolation thoughts are likely to turn to the future and what we can do to ensure our family are cared for once we are gone.
The number of Wills being written and reviewed as a result of the Coronavirus have spiked, as people take the necessary steps to ensure their wishes are met and families are supported.
As part of the process of writing or preparing a Will, it is important to consider how Inheritance Tax (IHT) and and Capital Gains Tax (CGT) may affect your estate and whether your beneficiaries could end up with a tax bill once you have passed.
At the most basic level, IHT is payable at a rate of 40 per cent on estates worth over £325,000 at the date of death (although this may be affected by certain rules and reliefs).
It can also become due on certain lifetime gifts of assets, at a reduced rate of 20 per cent.
Generally speaking, it is never too early to plan for IHT – especially if you have an estate worth more than £325,000, or £650,000 for married couples/civil partners, then it is worth exploring the options to reduce an IHT bill for your beneficiaries.
Protecting your family from IHT
There are planning opportunities available that can mitigate the tax due on your estate and so it is important to review what options may be available to you at this time.
Not all of the options below may be appropriate for your needs, which is why it is advised that you speak with an experienced professional at the earliest opportunity when preparing a Will or arranging your estate.
Every person in the UK has an allowance for IHT, known as the Nil-Rate Band. For an individual, this is £325,000, but this can be transferred to a spouse so that a couple can have an estate worth £650,000 and not pay any IHT.
Any amount over this allowance will usually be taxed at 40 per cent unless other reliefs are being used.
Since 2017 families have also been able to make use of the Residence Nil-Rate Band, which is an additional allowance connected to property. This was introduced in response to growing house prices across the UK.
This allowance, as of 6 April 2020, works alongside the Nil-Rate Band to allow couples to pass on up to £1 million tax-free, as long as a property that you had at some time used as a dwelling, is passed on either to a surviving spouse or directly to your lineal descendants.
To use this allowance your estate must be valued at no more than £2 million. If your estate is more than £2 million then for every £2 above that amount you would lose £1 of the relief.
There’s usually no IHT to pay on small gifts you make out of your normal income, such as Christmas or birthday presents, which are commonly referred to as ‘exempted gifts’.
There is also no IHT to pay on gifts between spouses or civil partners and you can transfer as you like during your lifetime, as long as they live in the UK permanently.
However, other gifts count towards the value of your estate and you could be charged IHT if you give away more than £325,000 in the seven years before your death.
Gifts include anything that has a value or anything transferred at a loss to a family member, such as the sale of a home to a descendant for less than it is worth.
You can, however, give away £3,000 worth of gifts each tax year without them being added to the value of your estate thanks to the ‘annual exemption’.
If you have any unused annual exemption you can carry it forward to the next year – but only for one year.
Each tax year, you can also give away additional gifts if they relate to special events such as weddings, birthdays or Christmas, or if they support the living costs of another person, such as an elderly relative or a child under 18.
You can give as many gifts of up to £250 per person as you want during the tax year as long as you have not used another exemption on the same person.
If there’s IHT to pay, it’s charged at 40 per cent on gifts given in the three years before you die. Gifts made three to seven years before your death are taxed on a sliding scale known as ‘taper relief’. After seven years the gift will be IHT-free.
Under the current conditions, it may not be possible to make use of the gifting rules, however, it may be suitable to make plans to do so.
Business Property Relief or Agricultural Property Relief
Certain assets receive relief from IHT, these include Business Property, Agricultural Property and Heritage Assets. These reliefs can reduce or eliminate the value of an asset being included within an estate, but they often rely on certain conditions being met.
For example, Business Property Relief (BPR) has been an established part of IHT legislation for more than 40 years.
It ensures that BPR-qualifying shares that have been owned for at least two years, they can be passed on free from IHT on the death of the shareholder. However, not every interest in a business will qualify for BPR so it is worth seeking specialist professional advice when managing your estate.
Anything left to charity in your Will won’t count towards the total taxable value of your estate. Known as a ‘charitable legacy’, this will also reduce the IHT rate on the rest of your estate from 40 per cent to 36 per cent, as long as you leave at least 10 per cent to charity.
Trusts can play a role in reducing a family’s exposure to IHT so that more can be passed on to future generations, but they say they can also help look after family assets and provide for family members who are too young or vulnerable to deal with financial matters.
A trust is a legal arrangement where you gift cash, property or investments to a separate entity (the trust). One who gifts assets is the Settlor, the trustees then oversee the management of the assets for the benefit of a third party or parties.
One of the main benefits of a trust is that, should you elect to act as the trustee, you would continue to maintain control over the assets gifted whilst your estate’s exposure to IHT is reduced as, after seven years, the gift is out of the Settlor’s estate completely.
Assets transferred into a trust are no longer considered as belonging to the Settlor, so they are taxed according to the rules governing the trustee.
Many people would prefer to provide for a beneficiary through a trust as opposed to passing assets to them outright. This could involve a source of income for a beneficiary for life, or providing education for children but not allowing them to access funds until they are older.