Planning a will can seem like a morbid exercise for many, but it is an essential part of removing easily-avoidable asset risks. When preparing your will, there are several things to consider to ensure you leave the estate to your loved ones whilst also maximising any tax reliefs and exemptions.
Inheritance tax (IHT) is one area where those drafting their will can be caught out, particularly when careful inheritance tax planning is not undertaken.
For High Net Worth individuals, there are several inheritance tax planning options to explore. For those with larger estates especially, an expert’s guidance can be invaluable in helping uncover the best strategies for your circumstance and ensuring your assets are protected for the future generation.
How Much is Inheritance Tax?
A good place to start is going back to basics and understanding what inheritance tax entails and what it will mean for you.
The current IHT rate is 40% in excess of the nil rate band threshold which is charged on the part of your estate that does not benefit from any exemptions or reliefs. Assets that are not in the UK may still be subject to IHT.
Funds left by your estate may be used to pay IHT upon your death, organised by the executor of your will.
What is the Inheritance Tax Threshold?
Each person has a nil rate band of £325,000 over which inheritance tax is charged at 40% (unless there are exemptions or reliefs available). For those married or in a civil partnership, where the nil rate band is not used by the first spouse/partner’s estate, the unused portion can be transferred to the survivor’s estate, which could potentially mean a combined nil rate band of up to £650,000. It is important that you consider tax planning for your estate as an ongoing exercise.
A main residence nil-rate band was introduced in 2017, which is available in addition to the nil rate band of £325,000. The current residence nil rate band is £175,000. The residence nil rate band aims to help reduce the inheritance tax where the family home passes to direct descendants - this includes to adopted, foster or step children. The amount available reduces down once the estate reaches £2 million. For estates that exceed £2.35 million, the residence nil-rate band will be reduced to zero and will therefore not apply.
Inheritance Tax Exemptions
There may be other exemptions and reliefs available to an estate, which include:
- Exempt gifts and charities
- Spouse exemption
- Business property relief
- Agricultural property relief
- Heritage relief
Inheritance Tax Planning
Simply doing nothing and leaving your assets to beneficiaries in your will without the necessary planning can make your estate liable to taxation at a high rate. Preemptively reducing the amount of inheritance tax your estate will have to pay and taking any suitable steps while you're alive gives you more control over how much your beneficiaries will receive.
We can take you through the options available to your circumstances and how best to plan to reduce your estate inheritance tax liability.
Reviewing Your Will
Taking advice and carefully structuring your Will can help reduce that amount of tax payable.
You may wish, for example, to pass an asset that receives full or part tax relief to someone who is not tax-exempt. This could, by way of an example, include passing certain types of business assets to your children rather than your spouse/civil partner. We can provide advice on how best to structure your Will, taking into account who your beneficiaries are to be and maximise the available exemptions and reliefs.
You may also wish to consider how to leave assets to children or others but not in a way where they receive assets immediately.
Setting Up Trusts
Your particular asset and family structure may benefit from using trusts as part of your tax planning.
Transferring assets into a trust means that once any conditions are satisfied, they are no longer within your control nor within your estate for inheritance tax purposes. The trust itself will have its own reporting obligations and tax liabilities, so it is important to ensure you obtain advice before you set up trusts, whether in your lifetime or in your Will.
As well as being a tax planning vehicle, trusts can serve as structures providing security for your estate and beneficiaries.
Making Gifts
Generally, you can make a gift of any size to any beneficiary and provided you survive seven years from the date of the gift - this will no longer form part of your estate.
There are several options that allow you to make gifts throughout your life without being included in the sum of your estate upon your death. Gift exemptions include:
- Gifts between spouses and civil partners
- Annual gifts of up to £3,000 given as a personal allowance
- Annual gifts of up £250 per person
- Wedding gifts of £1,000, £2,500 or £5,000 (subject to your relation to the beneficiary)
- Gifts from surplus income
- Gifts given to charities or national organisations (whether given during your lifetime or left in your will)
There are specific rules for each type of gift which will need to be considered to ensure that the exemption or relief can be claimed.
Where you make a gift not falling within the above list, it may be subject to inheritance tax. After three years from the date the gift was made, the tax due on the gift tapers with each whole year you survive. Gifts not exempt and made in the three years before your death may be subject to the inheritance tax at 40%.
We would also advise you to carefully consider the lifetime gifts you make to ensure you retain with enough funds for yourself/dependants, and what, if any, arrangements need to be made should the gifts not be fully relieved of inheritance tax by the date of your death. You may wish to take advice before making the gift to confirm that the manner in which the gift is made satisfies HMRC conditions.
Making gifts into a flexible or discretionary trust can fall under chargeable lifetime transfers, and there are specific tax rules surrounding these types of gifts, so it is imperative you obtain specialist tax advice before making these types of gifts.
Using Life Insurance
Whilst taking out a life insurance policy is not so much about reducing the eventual inheritance tax bill, it can provide an alternative way to pay the amount due. This ensures other parts of your estate do not have to be sold to cover the tax due.
It would be advisable to confirm whether any life insurance policies you have can be placed in a trust. The benefit of this means that (a) it is not included in your estate for inheritance tax purposes and (b) often the insurance providers will pay this on sight of a death certificate so there is no need to wait until probate has been issued in order to make the claim for the funds.
Needless to say, navigating inheritance tax can be a complex area as there are often several factors at play, including considering how to leave your estate to your beneficiaries, your potential tax liability and how this will be settled. NSS Legal can help you get it right. For more advice on will preparation, including making them tax-efficient, please make an enquiry with the NSS Legal team.