Your estate consists of all the money, assets, stocks and shares, business, insurance policies and property you own. So when it comes to protecting it, the two big taxes that can impact on it’s size are Inheritance Tax [IHT] and Capital Gains Tax [CGT] – so any tax planning strategy needs to consider the overall impact of either applying to your estate. Tax planning strategies also need to consider your income tax position, the impact on your business, the impact on your future needs including care funding and your general financial circumstances.
Tax planning is an area which people find particularly daunting and something that is often put off or not done at all which leads to far too much tax of one kind or another being paid when it could have been avoided or reduced.
We are here to guide you through this minefield.
Sound Inheritance Tax planning and advice is vital to ensure that no more tax than necessary is paid from your estate after your death. Currently every individual in the UK has a tax free allowance for inheritance tax known as their Nil Rate Band (NRB). The NRB at present is £325,000. This means that upon your death the first £325,000 of your estate can be left tax free. The remainder may be subject to 40% without careful planning.
The available NRB is reduced by any lifetime gifts you have made over certain prescribed limits within the last 7 years. So for example if you gave away £50,000 the year before you die your NRB for the remainder of your estate is reduced to £275,000 so anything over that will be subject to 40% tax.
In addition to the NRB there is now a Residence Nil Rate Band (RNRB). This is currently £175,000 in 2020/2021. However, the property must be left as part of your estate to a direct descendent (children, grandchildren, their spouses, step children, foster children etc).
Example: let’s say you and your spouse want to make a will leaving everything to each other and then on the death of the second spouse, their estate is to go to your children. You own your home and it’s worth £300,000 and the remainder of your joint estates is £700,000, you will both have the benefit of your NRB of £325,000 = £650,000 plus £175,000 each for the RNRB = £350,000. Therefore, on the death of the second spouse they have the benefit of £650,000 NRB which means only £50,000 would attract tax at 40%. As the property is worth £300,000 the RNRB would apply and therefore no tax would be payable (this is assuming that no lifetime gifts have been made in the preceding seven years).
However, if your total estate exceeds £2million then the RNRB is subject to a taper that reduces the amount by £1 for every £2 your estate exceeds that limit.
Any gifts you leave to your spouse, civil partner or to charity within your will are also free of inheritance tax.
As mentioned above any lifetime gifts you make within 7 years of your death will reduce your available NRB on death. This is subject to certain small exemptions including the £3,000 annual allowance, the small gifts exemption of £250 per recipient, gifts from surplus income and gifts on marriage to children, grandchildren or other relatives.
If you survive 7 years from the making of a gift to an individual there is no tax impact on that gift for your estate.
If the gift exceeds the NRB and you die within the 7 year period then the recipient of the gift may be faced with a tax bill on your death. In these circumstances consideration could be given to 7 year term life insurance.
Further Inheritance Tax planning strategies
These are numerous and specific advice should be taken but by way of an example these will typically include:
• Lifetime giving,
• Life insurance,
• Creating trusts,
• Business Property Investments,
• Making gifts of the family home where relatives live with you
• Making gifts of holiday homes and paying for their use moving forward
• Making a considered will
• Making a Lasting Power of Attorney
• Charitable giving
Capital Gains Tax
As above any strategy to reduce Inheritance Tax must consider Capital Gains Tax.
Firstly, giving away cash is not subject to a CGT charge but gifts of assets that have increased in value during your period of ownership may be subject to this tax. The tax is essentially on the profit you have made and is chargeable whether you sell or give away a chargeable asset.
An example here is giving away a holiday home that has increased in value significantly. After deduction of relevant costs and expenses the remaining gain is then subject to tax.
In addition each individual has an annual exemption they can deduct but the remaining gain is then taxable. The rates for CGT vary between 10%, 18%, 20% and 28% depending upon the type of asset disposed of and the tax payers income tax position.
How we can help
We will look at ways of reducing the value of your estate for IHT purposes whilst being mindful of the implication for CGT and your general financial health. There must be a balance between reducing your future tax bill with not giving away too much (unless you want to). Starting the planning process early, helps you to understand where you stand and what you ought to do going forward. Each person’s situation is individual, so we take the time to understand your circumstances and objectives and advise you accordingly.